When calculating annual cash flows, what is subtracted to find earnings before taxes (EBT)?

To determine earnings before taxes (EBT) when calculating annual cash flows, depreciation is subtracted from earnings before interest and taxes (EBIT). Depreciation is a non-cash expense that reflects the reduction in value of tangible fixed assets over time. By subtracting depreciation, a more accurate picture of the cash flow generated by the business is achieved, as it adjusts for the accounting effect of asset wear and tear.

This approach is crucial because, while depreciation impacts the income statement, it does not represent an actual cash outflow during the period being analyzed. Therefore, adding back depreciation in the cash flow calculations is essential to determine the actual cash available after accounting for all non-cash expenses. By following this method, we arrive at the EBT figure, which is instrumental in assessing the profitability of the business before tax obligations are considered.