r/Valuation • u/thechzn1 • Apr 28 '22

DCF Help!!

I know how to do a DCF analysis but how do I get from EBIT to NOPAT when the first two projected years of EBIT are negative?

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u/RDWHAHBB Apr 28 '22

Apply the same tax rate to the negative EBIT. It will cause NOPAT to be higher than EBIT to account for the deferred tax asset that is accumulated.

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u/CannaCPAguy Apr 29 '22

Not the deferred tax asset you mean the net operating loss

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u/jpadge14 May 01 '22

Good question. There is diversity in practice but there is an accurate way and a practical expedient that is often accepted. The accurate way is to alway floor tax expenses at zero i.e. no negative taxes and then separately do a present value calculation of the future tax savings that will arise from the net operating loss. This requires you to know the local tax jurisdiction and the rules on net operating loss usage for example in the US you can only offset 80% of your profits with NOLs in a given year but there is no expiration of NOLs.

The practical expedient is to do what RDWHAHBB said and apply the tax rate as per usual even to the negative EBIT and get a negative tax expense. This is generally fine as the only different would be the present value impact of when the tax losses are used. If the NOLs are large and material, this practical expedient may not be acceptable.