What is 'Debt-Adjusted Cash Flow - DACF'

Debt-adjusted cash flow (DACF) is commonly used to analyze oil companies and represents pre-tax operating cash flow (OCF) adjusted for financing expenses after taxes. Adjustments for exploration costs may also be included, as these vary from company to company depending on the accounting method used. By adding the exploration costs, the effect of the different accounting methods is removed. DACF is useful because companies finance themselves differently, with some relying more on debt.

Debt-adjusted cash flow is calculated as follows:

DACF = cash flow from operations + financing costs (after tax)

BREAKING DOWN 'Debt-Adjusted Cash Flow - DACF'

Debt-adjusted cash flow (DACF) is often used in valuation because it adjusts for the effects of a company's capital structure. If a company uses a lot of debt, the commonly used Price/Cash Flow (P/CF) ratio may indicate the company is relatively cheaper than if its debt were taken into account. P/CF is the ratio of the company's stock price to its cash flow. If a company employs debt, its cash flow may be boosted while its share price is unaffected, resulting in a lower P/CF ratio and making the company look relatively cheap.

The EV/DACF ratio removes this problem. EV, or enterprise value, reflects the amount of debt a company has, and DACF reflects the after-tax cost of that debt. The valuation ratio EV/EBITDA is used commonly to analyze companies in a variety of industries, including oil and gas. But in oil and gas, EV/DACF is also used as it adjusts for after-tax financing costs and exploration expenses, allowing for an apples-to-apples comparison.

RELATED TERMS
  1. Free Cash Flow Yield

    An overall return evaluation ratio of a stock, which standardizes ...
  2. Operating Cash Flow - OCF

    Operating Cash Flow (or OCF) is a measure of the amount of cash ...
  3. Free Cash Flow Per Share

    On a per share basis, free cash flow per share is cash available ...
  4. Price-To-Cash-Flow Ratio

    The price-to-cash-flow ratio is a stock valuation indicator that ...
  5. Levered Free Cash Flow

    The free cash flow that remains after a company has paid its ...
  6. Price Per Flowing Barrel

    A metric used to determine the value of a oil and gas company. ...
Related Articles
  1. Investing

    Is Sales Growth Weaker Than Inventory Growth?

    Find out why Goldman Sachs Equity Research is concerned about inventory growth, which appears to be outpacing sales growth for many U.S. sectors.
  2. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  3. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  4. Investing

    Cash Flow Statement: Reviewing The Cash Flow From Operations

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods for calculating it.
  5. Investing

    Cash Flow Indicator Ratios

    Learn about the operating cash flow to sales ratio, free cash flow to operating cash flow ratio and free cash flow coverage ratio.
  6. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  7. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  8. Tech

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
RELATED FAQS
  1. What metrics can be used to evaluate companies in the oil and gas sector?

    Learn how to analyze oil and gas sector companies using the same metrics and analytical techniques as professional investment ... Read Answer >>
  2. What is the difference between cash flow and revenue?

    Understand the difference between cash flow and revenue as they relate to corporate accounting and the financial evaluation ... Read Answer >>
  3. What's more important, cash flow or profits?

    Learn about the different effects of cash flow and profit have on a business and how you can use the information for your ... Read Answer >>
  4. How should I evaluate a company with negative cash flow investing activities?

    Understand how a negative cash flow from investing activities should be evaluated. Learn the sources and uses of cash in ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center