- Why is Scenario As Net Profit lower than Cash Flow?

- Why is Scenario Bs Net Profit negative and Cash Flow positive?

- And why is Scenario Cs Net Profit positive and Cash Flow negative?

B C D E F H I L M N 0 Accounting Profit versus Cash Flow Positive Profit, Positive Cash Flow Negative Profit (Loss), Positive Cash Flow Positive Profit, Negative Cash Flow Terminology In Millions Sales COGS Gross Profit Operating Expenses: R&D, SG&A Depreciaton*, Amortization EBIT: Operating Profit Interest Expense EBT Tax 40% Net Profit (Loss) 100 (40) 60 (20) (5) 35 (5) 30 In Millions Sales COGS Gross Profit Operating Expenses: R&D, SG&A Depreciaton*, Amortization EBIT: Operating Profit Interest Expense EBT Tax 40% Net Profit (Loss) 100 (40) 60 (20) (50) (10) (5) (15) In Millions Sales (60% is uncollected A/R) COGS Gross Profit Operating Expenses: R&D, SG&A Depreciation*, Amortization EBIT: Operating Profit Interest Expense EBT Tax 40% Net Profit (Loss) 100 (40) 60 (20) (5) 35 (5) 30 (12) 18 Sales = Revenues COGS = Cost of Goods Sold Sales - COGS = Gross Profit R&D = Research + Development; SG&A = Sales, General + Administrative Non-cash Expenses = Accounting expenses EBIT = Earnings Before Interest and Taxes = Operating Profit Interest on debt EBT = Earnings Before Taxes Tax on EBT Net Profit = Net Income = Net Earnings 0 (12) 18 (15) Above are accounting numbers Above are accounting numbers Above are accounting numbers Below are adjustments to arrive at Cash Flow Below are adjustments to arrive at Cash Flow Below are adjustments to arrive at Cash Flow Terminology continued 35 35 EBIT: Operating Profit Depreciaton, Amortization EBIT: Operating Profit Depreciaton, Amortization (10) 50 5 5 EBIT: Operating Profit Depreciation, Amortization Sales: Uncollected A/R EBITDA: Cash Flow Proxy (60) (20) EBITDA: Cash Flow Proxy 40 EBITDA: Cash Flow Proxy 40 EBIT = Earnings Before Interest and Taxes = Operating Profit Non-cash Expenses = Accounting expenses Uncollected Accounts Receivable is booked as "Sales" in accounting practice, although cash was not received EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization "Cash Flow Proxy" means that EBITDA may be used as "Cash Flow" in NPV models If there is no Depreciation or Amortization, then EBIT may be used as Cash Flow Proxy Capex = Capital Expenditure; Depreciated over 10 years *50M Capex 10 year straight line *500M Capex 10 year straight line *50M Capex 10 year straight line