Brian Feroldi on LinkedIn: EBITDA Vs FCF What's the difference? EBTIDA = EARNINGS BEFORE INTEREST… | 55 comments (2024)

Great summary of EBITDA calculation.

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Great comparative of two of the most important financial indicators.

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EBITDA Vs FCFWhat's the difference?EBTIDA = EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATIONFORMULA: Net Income + Depreciation & Amortization +/- Non-Operating Income And Expenses + Interest + Income Tax Expense→ EBITDA measures a company's ability to generate profits before considering non-operating expenses such as interest, taxes, depreciation, and amortization.PROS:1: Comparability: EBITDA allows companies with different capital structures to be compared.2: Simplicity: EBITDA provides a quick snapshot of a company’s profit performance.3: Proxy for Cash Generation: EBITDA is often used as a fast way to measure a company's ability to generate cash from its core operations.CONS:1: Ignores Non-Operating Expenses: EBITDA excludes important expenses such as interest, taxes, depreciation, and amortization.2: Lack of Cash Flow Information: EBITDA does not provide an accurate insight into a company's ability to generate cash.3: Susceptible to Manipulation: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.FCF = FREE CASH FLOWFORMULA: Net Income + Depreciation & Amortization +/- Non-Cash Income And Expenses +/- Changes In Net Working Capital - Capital Expenditures→FCF measures a company’s ability to generate cash from operations using cash accounting after deducting capital expenditures (CAPEX).PROS:1: Focus on Cash: FCF directly measures the cash generated by a company's operations.2: Flexibility: FCF is a better measure of a company’s ability to pay off debt and return capital to shareholders3: Hard To Manipulate: FCF is much harder for a management team to manipulate than EBITDA or Net IncomeCONS:1: Complexity: There are many varieties of FCF, which can make them time-consuming to calculate2: Volatility: FCF can fluctuate widely from year to year due to changes in working capital needs and capital expenditure spending cycles.3: Limited Comparability: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.Personally, I value Free Cash Flow 10x higher than EBITDA, but I understand why EBITDA is so widely used.Which metric do you use? Let me know in the comments below!***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Get started here (It's free) →https://lnkd.in/eKbRV7g6If you enjoyed this post, please repost ♻️ to share with your audience.

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👉 Analyse EBITDA to make a first analysis of the company or the companies you want to know about. Use FCF to look deeper into the flow of money: where it comes from and where it goes.Are you interested in a particular #franchise? 🤔 Take EBITDA into consideration to find out about its capacity to generate profits. But do not forget that you will have to make some start-up investment, which, in the event that you finance with external resources, you will have to pay back that money. This money will not be reflected in the EBITDA but may represent a significant cash outflow! Nor are the reinvestments that you will have to make throughout the life of the franchise reflected in the EBITDA, be it the acquisition of new training equipment (if it is a gym), or new kitchen equipment (if it is a restaurant).👏 A very good post Brian Feroldi. It clearly shows two key elements when it comes to making investment decisions.

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EBITDA sometimes serves as a better measure for the purposes of comparing the performance of different companies. Free cash flow is unencumbered and may better represent a company's real valuation.Both measures have their place, and each one deserves consideration alongside the other, the comparison below shows pros and cons for each one:

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EBITDA Vs FCFWhat's the difference?EBTIDA = EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATIONFORMULA: Net Income + Depreciation & Amortization +/- Non-Operating Income And Expenses + Interest + Income Tax Expense→ EBITDA measures a company's ability to generate profits before considering non-operating expenses such as interest, taxes, depreciation, and amortization.PROS:1: Comparability: EBITDA allows companies with different capital structures to be compared.2: Simplicity: EBITDA provides a quick snapshot of a company’s profit performance.3: Proxy for Cash Generation: EBITDA is often used as a fast way to measure a company's ability to generate cash from its core operations.CONS:1: Ignores Non-Operating Expenses: EBITDA excludes important expenses such as interest, taxes, depreciation, and amortization.2: Lack of Cash Flow Information: EBITDA does not provide an accurate insight into a company's ability to generate cash.3: Susceptible to Manipulation: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.FCF = FREE CASH FLOWFORMULA: Net Income + Depreciation & Amortization +/- Non-Cash Income And Expenses +/- Changes In Net Working Capital - Capital Expenditures→FCF measures a company’s ability to generate cash from operations using cash accounting after deducting capital expenditures (CAPEX).PROS:1: Focus on Cash: FCF directly measures the cash generated by a company's operations.2: Flexibility: FCF is a better measure of a company’s ability to pay off debt and return capital to shareholders3: Hard To Manipulate: FCF is much harder for a management team to manipulate than EBITDA or Net IncomeCONS:1: Complexity: There are many varieties of FCF, which can make them time-consuming to calculate2: Volatility: FCF can fluctuate widely from year to year due to changes in working capital needs and capital expenditure spending cycles.3: Limited Comparability: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.Personally, I value Free Cash Flow 10x higher than EBITDA, but I understand why EBITDA is so widely used.Which metric do you use? Let me know in the comments below!***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

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𝗘𝗕𝗜𝗧𝗗𝗔 𝘃𝘀. 𝗙𝗖𝗙: 𝗛𝗲𝗿𝗲'𝘀 𝘄𝗵𝗮𝘁 𝗖𝗙𝗢𝘀 𝗻𝗲𝗲𝗱 𝘁𝗼 𝗸𝗻𝗼𝘄...They are not the same.EBITDA is an accounting measure.FCF is a cash flow measure.EBITDA is better used to estimate operational cash flow.FCF is used to estimate how much money is available to service your capital providers.----------Now let's turn to a fuller explanation.EBITDA = Earnings Before Interest Taxes Depreciation & AmortizationFCF = Free Cash Flow𝘌𝘉𝘐𝘛𝘋𝘈 is a measure of a company's operating performance and profitability before considering non-operating expenses such as interest, taxes, depreciation, and amortization. It is calculated by adding back these expenses to the net income.𝘍𝘊𝘍 represents the cash a company generates from its operations after deducting capital expenditures (CAPEX). It measures the amount of cash available to the company for reinvestment, debt reduction, dividends, or other uses.𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀 𝗼𝗳 𝗘𝗕𝗜𝗧𝗗𝗔1. 𝗦𝗶𝗺𝗽𝗹𝗶𝗰𝗶𝘁𝘆: EBITDA is a straightforward metric that provides a quick snapshot of performance.2. 𝗖𝗼𝗺𝗽𝗮𝗿𝗮𝗯𝗶𝗹𝗶𝘁𝘆: EBITDA allows for easier comparison of the operating performance of different companies.3. 𝗙𝗼𝗰𝘂𝘀 𝗼𝗻 𝗰𝗮𝘀𝗵 𝗴𝗲𝗻𝗲𝗿𝗮𝘁𝗶𝗼𝗻: EBITDA is often used to assess a company's ability to generate cash from its core operations.𝗗𝗿𝗮𝘄𝗯𝗮𝗰𝗸𝘀 𝗼𝗳 𝗘𝗕𝗜𝗧𝗗𝗔1. 𝗜𝗴𝗻𝗼𝗿𝗲𝘀 𝗻𝗼𝗻-𝗼𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗲𝘅𝗽𝗲𝗻𝘀𝗲𝘀: EBITDA does not account for important expenses such as interest, taxes, depreciation, and amortization.2. 𝗟𝗮𝗰𝗸 𝗼𝗳 𝗰𝗮𝘀𝗵 𝗳𝗹𝗼𝘄 𝗶𝗻𝗳𝗼𝗿𝗺𝗮𝘁𝗶𝗼𝗻: EBITDA doesn't provide insight into a company's actual cash flows.3. 𝗦𝘂𝘀𝗰𝗲𝗽𝘁𝗶𝗯𝗹𝗲 𝘁𝗼 𝗺𝗮𝗻𝗶𝗽𝘂𝗹𝗮𝘁𝗶𝗼𝗻: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀 𝗼𝗳 𝗙𝗖𝗙1. 𝗖𝗮𝘀𝗵 𝗳𝗹𝗼𝘄 𝗳𝗼𝗰𝘂𝘀: FCF provides a direct measure of the cash generated by a company's operations.2. 𝗟𝗼𝗻𝗴-𝘁𝗲𝗿𝗺 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗶𝗹𝗶𝘁𝘆: FCF is a valuable indicator of a company's ability to generate sustainable cash flows over time.3. 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆: Use FCF to evaluate various aspects of performance, like reinvestment potential and debt-paying ability.𝗗𝗿𝗮𝘄𝗯𝗮𝗰𝗸𝘀 𝗼𝗳 𝗙𝗖𝗙1. 𝗖𝗼𝗺𝗽𝗹𝗲𝘅𝗶𝘁𝘆: Calculating FCF can be time-consuming and prone to errors as it requires a lot of analysis.2. 𝗩𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆: FCF is subject to fluctuations due to changes in working capital requirements or capital expenditures.3. 𝗟𝗶𝗺𝗶𝘁𝗲𝗱 𝗰𝗼𝗺𝗽𝗮𝗿𝗮𝗯𝗶𝗹𝗶𝘁𝘆: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.----------Which of the two KPIs is your favorite?What benefits and drawbacks would you like to highlight?

BORROWING COSTS - IAS 23This accounting standard deals with the treatment of costs (interest or other costs) associated with borrowings that are directly attributable to the acquisition, construction, or production of a qualifying asset.Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale.IAS 23 requires the accountant to capitalize the borrowing cost (interest or other costs associated with the borrowed funds) to the value of the asset if the cost is directly attributable to the acquisition, construction, or production of the asset, otherwise, such cost should be expensed. WHEN TO CAPITALISE?Capitalization of borrowing costs begins when all the following conditions are met:1. Expenditures for the asset have begun.2. Interests on borrowings are being incurred.3. Activities required to prepare the asset for its intended use or sale have begun.WHAT CAPITALISATION RATE SHOULD BE USED?Typically, capitalization should be the actual borrowing rate or the weighted average borrowing rate if the entity has multiple borrowings.HOW MUCH SHOULD BE CAPITALISED?Capitalization should be to the extent of the cost of borrowings (interest), less any investment income gained on temporary investments made on the borrowed funds.WHEN IS CAPITALISATION SUSPENDED?Capitalization of costs shall be suspended if active development of the asset is interrupted for extended periods.NB: Temporary delays or technical/administrative work shall not result in suspension.WHEN SHOULD CAPITALISATION CEASE?Typically, the capitalization of borrowing costs ceases when the physical construction of the asset is finished. However, in cases where an asset consists of distinct stages or components, capitalization should be discontinued as each stage or part reaches completion. DISCLOSURESIAS 23 requires disclosure of the following in the financial statements:1. The accounting policy adopted for borrowing costs2. The total amount of borrowing costs capitalized during the period.3. The capitalization rate used for borrowing costs.ILLUSTRATIONFKP Plc is building a new office space. They have borrowed $1 million at an annual interest rate of 15% to finance the construction. The construction of the building takes two years to complete. During the first year X1, half of the funds were invested in a 12months bond yielding 12% p.a. How should this be treated as at 31/12/x1 if activities, interest, and expenditure began on 01/01/x1SOLUTION- The asset is a qualifying asset due to the substantial period it will take to get ready for its use/sale- Capitalization shall begin on 01/01/x1 because activities, interest, and expenditure began on that date. - Capitalization rate shall be the rate on the borrowings which is 15%- Amount to be capitalized shall be the cost of borrowings less any investment incomeCapitalization= (15% x $1m) - (12% x $500,000) = $90,000 - DisclosuresThank you!Like/comment/Share

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𝗘𝗕𝗜𝗧𝗗𝗔 𝘃𝘀. 𝗙𝗖𝗙: 𝗛𝗲𝗿𝗲'𝘀 𝘄𝗵𝗮𝘁 𝗖𝗙𝗢𝘀 𝗻𝗲𝗲𝗱 𝘁𝗼 𝗸𝗻𝗼𝘄...They are not the same.EBITDA is an accounting measure.FCF is a cash flow measure.EBITDA is better used to estimate operational cash flow.FCF is used to estimate how much money is available to service your capital providers.----------Now let's turn to a fuller explanation.EBITDA = Earnings Before Interest Taxes Depreciation & AmortizationFCF = Free Cash Flow𝘌𝘉𝘐𝘛𝘋𝘈 is a measure of a company's operating performance and profitability before considering non-operating expenses such as interest, taxes, depreciation, and amortization. It is calculated by adding back these expenses to the net income.𝘍𝘊𝘍 represents the cash a company generates from its operations after deducting capital expenditures (CAPEX). It measures the amount of cash available to the company for reinvestment, debt reduction, dividends, or other uses.𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀 𝗼𝗳 𝗘𝗕𝗜𝗧𝗗𝗔1. 𝗦𝗶𝗺𝗽𝗹𝗶𝗰𝗶𝘁𝘆: EBITDA is a straightforward metric that provides a quick snapshot of performance.2. 𝗖𝗼𝗺𝗽𝗮𝗿𝗮𝗯𝗶𝗹𝗶𝘁𝘆: EBITDA allows for easier comparison of the operating performance of different companies.3. 𝗙𝗼𝗰𝘂𝘀 𝗼𝗻 𝗰𝗮𝘀𝗵 𝗴𝗲𝗻𝗲𝗿𝗮𝘁𝗶𝗼𝗻: EBITDA is often used to assess a company's ability to generate cash from its core operations.𝗗𝗿𝗮𝘄𝗯𝗮𝗰𝗸𝘀 𝗼𝗳 𝗘𝗕𝗜𝗧𝗗𝗔1. 𝗜𝗴𝗻𝗼𝗿𝗲𝘀 𝗻𝗼𝗻-𝗼𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗲𝘅𝗽𝗲𝗻𝘀𝗲𝘀: EBITDA does not account for important expenses such as interest, taxes, depreciation, and amortization.2. 𝗟𝗮𝗰𝗸 𝗼𝗳 𝗰𝗮𝘀𝗵 𝗳𝗹𝗼𝘄 𝗶𝗻𝗳𝗼𝗿𝗺𝗮𝘁𝗶𝗼𝗻: EBITDA doesn't provide insight into a company's actual cash flows.3. 𝗦𝘂𝘀𝗰𝗲𝗽𝘁𝗶𝗯𝗹𝗲 𝘁𝗼 𝗺𝗮𝗻𝗶𝗽𝘂𝗹𝗮𝘁𝗶𝗼𝗻: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀 𝗼𝗳 𝗙𝗖𝗙1. 𝗖𝗮𝘀𝗵 𝗳𝗹𝗼𝘄 𝗳𝗼𝗰𝘂𝘀: FCF provides a direct measure of the cash generated by a company's operations.2. 𝗟𝗼𝗻𝗴-𝘁𝗲𝗿𝗺 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗶𝗹𝗶𝘁𝘆: FCF is a valuable indicator of a company's ability to generate sustainable cash flows over time.3. 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆: Use FCF to evaluate various aspects of performance, like reinvestment potential and debt-paying ability.𝗗𝗿𝗮𝘄𝗯𝗮𝗰𝗸𝘀 𝗼𝗳 𝗙𝗖𝗙1. 𝗖𝗼𝗺𝗽𝗹𝗲𝘅𝗶𝘁𝘆: Calculating FCF can be time-consuming and prone to errors as it requires a lot of analysis.2. 𝗩𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆: FCF is subject to fluctuations due to changes in working capital requirements or capital expenditures.3. 𝗟𝗶𝗺𝗶𝘁𝗲𝗱 𝗰𝗼𝗺𝗽𝗮𝗿𝗮𝗯𝗶𝗹𝗶𝘁𝘆: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.----------Which of the two KPIs is your favorite?What benefits and drawbacks would you like to highlight?🧑💼 I'm a partner at Business Partnering Institute🆘 Need immediate help in your finance team, call us!🤝 We help increase the influence of your finance team

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A good snapshot comparing EBITDA and FCF.

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