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.
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