Are CFO and EBIT the same?

CFA Level I FRA
#1

I found in my notes this formula for interest coverage:
Interest coverage = (CFO + Interest Expense + Taxes Paid) / Interest Paid
Interest coverage = EBIT / Interest Paid

This makes me think that EBIT = CFO.

Is that correct ?

#2

No.

1 Like
#3

thank you sir.

#4

IMHO–and I mean this to be constructive and helpful–the fact that you would ask that question tells me that your grasp of the notion of ‘cash flow’ (in its several iterations) is severely lacking. EBIT is an accounting measure that can be easily changed by changing the underlying accounting assumptions. Cash flow–however measured–is a fact. Net Income cannot, by itself, sustain a business. It needs cash. And that is why cash flow is so vital. At least as important is FREE cash flow; that helps create wealth for equity investors.

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#5

Thanks a lot StrategyGuy. Your explanation is crystal clear. EBIT and NI are accounting measures that can be easily modified depending on the accounting principles and estimations we use (for example, choosing a double-declining depreciation instead of straight line, or LIFO over FIFO…). While CFO is more factual and, from what i understood, exlusively impacted by the actual cash that flows to the company.
I will spend more time on these concepts in order to (hopefully) nail them down.

#6

Note that while it’s difficult to manipulate total cash flow (as it has to reconcile beginning and ending Cash account balances), it’s much easier to manipulate the classifications of cash flow (CFO, CFI, CFF). For example, under IFRS, cash interest paid can be classified as CFF or CFO. If supplies are capitalized rather than expensed, the cash paid for those supplies can be shown as CFI rather than CFO. And so on.

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#7

You’re spot-on with your use of the phrase “actual cash.” That’s pitch-perfect. Best regards - Warren Miller, CPA, CFA

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#8

Please correct my understanding here
EBIT is not equal to CFO BUT
CFO + Int + Tax = EBIT

Also CFO is calculated using Net Income adjusted for non cash expenses and working capital adjustments as we saw in FCFF workings.

Please confirm if my understanding here is correct.