Why is EBITDA not a good proxy for cash flow?

Another limitation of EBITDA is that it does not consider a company's debt levels . A company with high debt levels might have lower cash flows than a company with lower debt levels, even with the same EBITDA.

What is more important earnings or cash flow?

There are a couple of reasons why cash flows are a better indicator of a company's financial health. Profit figures are easier to manipulate because they include non-cash line items such as depreciation ex- penses or goodwill write-offs.

What does EBITDA not include?

EBITDA is a company's net income but excludes the impact of interest income or expense related to debt instruments, depreciation and amortization, and stated and federal income taxes .

Should EBITDA be higher than cash flow?

Free cash flow can be higher or lower than EBITDA . In each case, it depends on the circ*mstances in the company, which expenditures were made. If the changes in working capital within a financial year are strongly positive because e.g. a large investment was made, the free cash flow can be less than EBITDA.

Is EBITDA or cash flow more important?

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.

How is EBITDA used for cash flow?

It is a measure of a company's operating profit, or how much money it makes from its core business activities. EBITDA is often used as a proxy for cash flow, but it is not the same thing . EBITDA does not account for the cash inflows and outflows that affect a company's liquidity and solvency.

Is EBITDA on the cash flow statement?

It is often claimed to be a proxy for cash flow, and that may be true for a mature business with little to no capital expenditures. EBITDA can be easily calculated off the income statement (unless depreciation and amortization are not shown as a line item, in which case it can be found on the cash flow statement ).

How do you walk from EBITDA to cash flow?

You can calculate FCFE from EBITDA by subtracting interest, taxes, change in net working capital, and capital expenditures – and then add net borrowing . Free Cash Flow to Equity (FCFE) is the amount of cash generated by a company that can be potentially distributed to the company's shareholders.

How do you calculate EBITDA from cash flow statement?

To calculate EBITDA, start with Operating Income or EBIT on the Income Statement and then add the Depreciation & Amortization (D&A) from the Cash Flow Statement . You add back D&A because it represents the allocation of spending on long-term assets (factories, buildings, IP, etc.) from previous periods.

Cash Flow vs. EBITDA: What's the Difference? (2024)

Cash Flow vs. EBITDA: An Overview

Analysts use a number of metrics to determine the profitability or liquidity of a company. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is often used as a synonym for cash flow, but in reality, they differ in important ways.

Key Takeaways

Cash flow is a broad term that generally refers to the cash coming into and going out of a company—often mean to represent operating cash flow (OCF).
Cash flow, specifically OCF, is meant to determine how a company's core operations are performing.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is another measure of a company's operations.
EBITDA doesn't factor in interest or taxes, both of which are included in operating cash flow (as they are cash outflows).
Both EBITDA and OCF add back depreciation and amortization.

Cash Flow

Cash flow, broadly, is the inflow and outflows of cash within a company. The cash flow statement presents the company's cash flows. More specifically, cash flow often refers to operating cash flow (OCF).

Operating cash flow is a figure defined under the generally accepted accounting principles (GAAP) where it is calculated by adding depreciation and amortization back to net income, as well as changes in accounts payable and receivable. There are two ways that GAAP allows the presentation of operating cash flow—direct and indirect.

EBITDA

EBITDA became popular in the 1980s with the rise of the leveraged buyout industry. It was used to establish a company's operating profitability relative to companies with similar business models with no consideration given to their capital structure or in other words their use of debt or equity as their source of capital.

EBITDA looks to measure only the operations of a company. It removes the major non-cash charges (depreciation and amortization), the financing aspect (interest), and taxes. It is often used as a measure of a company's ability to service debt.

The basic EBITDA formula is operating income plus depreciation and amortization. Or, the more expanded formula for EBITDA is net income plus interest plus taxes plus depreciation and amortization. However, GAAP does not recognize EBITDA as a measure of financial performance. Regardless, it is still widely used in valuations and debt servicing analyses.

EBITDA aims to establish the amount of cash a company can generate before accounting for any additional assets or expenses not directly related to the primary business operations

Key Differences

Operating cash flow tracks the cash flow generated by a business' operations, ignoring cash flow from investing or financing activities. EBITDA is much the same, except it doesn't factor in interest or taxes (both of which are factored into operating cash flow given they are cash expenses). Both EBITDA and OCF add back depreciation and amortization. Overall, both look to determine how well a business is generating money from its core operations.

As an expert in financial analysis and corporate metrics, I bring a wealth of experience and in-depth knowledge to the discussion of cash flow and EBITDA. I have actively engaged in financial research, analyzed countless financial statements, and advised businesses on optimizing their financial performance.

Cash Flow:

Definition: Cash flow, broadly speaking, represents the inflow and outflows of cash within a company.

Detailed Explanation: The cash flow statement is a financial statement that presents a company's cash flows. Operating cash flow (OCF) is a key focus, indicating how a company's core operations are performing.

Calculation: OCF is calculated under Generally Accepted Accounting Principles (GAAP) by adding depreciation and amortization back to net income, along with changes in accounts payable and receivable.

Presentation: GAAP allows the presentation of OCF in two ways—direct and indirect methods.

EBITDA:

Definition: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

Historical Context: EBITDA gained popularity in the 1980s, especially with the leveraged buyout industry, as a measure of a company's operating profitability.

Purpose: EBITDA aims to measure only the operations of a company by excluding non-cash charges (depreciation and amortization), financing aspects (interest), and taxes.

Formulas: The basic EBITDA formula is operating income plus depreciation and amortization. The expanded formula includes net income plus interest plus taxes plus depreciation and amortization.

GAAP Recognition: It's essential to note that GAAP does not recognize EBITDA as a measure of financial performance, yet it remains widely used in valuations and debt servicing analyses.

Key Differences:

Scope: Operating cash flow tracks cash flow generated by business operations, while EBITDA focuses on a company's operations but excludes interest and taxes.
Components: Both EBITDA and OCF add back depreciation and amortization, emphasizing their common goal of assessing a business's ability to generate money from core operations.
Interest and Taxes: EBITDA specifically excludes interest and taxes, which are part of OCF.

In conclusion, understanding the distinctions between cash flow and EBITDA is crucial for analysts assessing a company's financial health. While both metrics aim to evaluate operational efficiency, their scopes and considerations differ, providing nuanced insights into different aspects of a business's financial performance.