Hi all -
This is probably a simple idea, but I can’t seem to intuitively reason it out. Anyway, read last night that “If working capital is growing, EBITDA will overstate CFO.” Can someone please explain to me why this is the case in simple terms…perhaps with an easy example? Appreciate the help as always.
W C increasing, means CA-CL>0 so basically Net C A are increasing, so it will reduce CFO(remember calculation?). But when we look at EBITDA only COGS is reduced…How?[COGS=op+pur-cl, if W C increases, Closing Stock increases, so COGS goes down]
Account Receivable increases as only that thig would affect EBITDA, so EBITDA will overstate
Another way,
CFO= NI+Dep-changes in W C
EBITDA=NI+TAX+DEP&AMORT+INT Just by simply looming at the formula, changes in W C, increases EBITDA so EBITDA overstates CFO