Which financial metric is measured by net operating profit after taxes (NOPAT) plus depreciation?

• A. Operating cash flow
• B. Net sales
• C. Earnings before interest and taxes (EBIT)
• D. Gross profit

Answer: (A)

Verified step by step guidance

1. Understand the concept of Net Operating Profit After Taxes (NOPAT): NOPAT represents the profit a company generates from its operations after deducting taxes but before financing costs like interest expenses.
2. Learn about depreciation: Depreciation is a non-cash expense that represents the reduction in value of tangible assets over time. It is added back to net income when calculating cash flow because it does not involve actual cash outflow.
3. Define Operating Cash Flow: Operating cash flow is a financial metric that measures the cash generated by a company’s core business operations. It is calculated by adding non-cash expenses (like depreciation) to NOPAT.
4. Analyze the formula: Operating cash flow = NOPAT + Depreciation. This formula highlights that operating cash flow is derived by combining NOPAT and depreciation to reflect the cash generated from operations.
5. Compare the options: Evaluate each option provided (Operating cash flow, Net sales, EBIT, Gross profit) and identify which one aligns with the formula and definition of operating cash flow.