When evaluating annual cash flows, what is typically added back at the end of the calculation?

In the context of evaluating annual cash flows, adding back depreciation at the end of the calculation is important because depreciation is a non-cash expense. This means that it reduces the taxable income for a company but does not actually involve a cash outflow during the period.

When calculating operating cash flows, the initial profit (or earnings before interest and taxes) is adjusted for non-cash expenses like depreciation in order to determine the actual cash generated or used by the business. Therefore, since depreciation reduces taxable income and appears as an expense on the income statement, it gets added back to net income when converting from accrual-based accounting to cash flow analysis. This way, we can ascertain the true cash flow available for operations and investments.

By including depreciation in cash flow calculations, analysts ensure they accurately reflect the cash available to the business, thus providing a clearer picture when making investment decisions or assessing financial health.