Question

Why is before tax cash flow (BTCF) a better measure of investor cash flow than net operating income (NOI)?

Answer 1

Net Operating Income (NOI) is calculated after deducting the depreciation, interest and tax liability. It deducts cash as well as non cash items like depreciation during calculation.

An investor is least bothered about the NOI or accounting income, which is more from GAAP perspective. Investor is more worried about the ability of an investment to generate cash flow.

Before tax cash flow shows the amount generated via revenues reduced by all cash bills and before any non cash item like depreciation. Futher, taxation is a fixed percentage of profit and therefore is not much relevant in decision making of acceptance or non-acceptance of project, therefore it doesn't play a direct role in investors decision making. Also, BTCF shows the ability of the core operations to generate cash flow before any payments related to capital structure, like interest payments. This makes the decision capital structure neutral.

Becasue of all these reasons, investor prefers BTCF over NOI.