FCF DTL/DTA Question...

CFA Level II Equities
#1

Can someone please explian:

If an analyst expects Deferred tax liabilities (DTL) to continue to increase (not reverse) increases in DTL should be added back to NI.

Increases in Deferred tax assets (DTA) that are not expected to reverse should be subtracted from NI.

This is for finding non cash charges free cash flow to firm…

You want Non cash charges to go up, which will increase NI and FCF. DTL is a liability, which is bad in the future… why would this be good for FCF?

Thanks!!

#2

I think the idea is that the liability isn’t being paid/recognized (understated NI) and the asset will never be realized (overstated NI).

#3

Liabilities aren’t good.

Not having to pay liabilities . . . priceless.