Hi everyone,

Can someone please explain to me this statement, I’m not really understanding the relationship:

If working capital is increasing, EBITDA overstates CFO

How? Thanks for your help

Hi everyone,

Can someone please explain to me this statement, I’m not really understanding the relationship:

If working capital is increasing, EBITDA overstates CFO

How? Thanks for your help

CFO=NI + Depr + Int (1-T) - WCInv

EBITDA = NI + Depr + Int (1-T)

maybe I am missing some parts … but point is if WC is increasing - some amount is being paid - which gets REMOVED while calculating CFO - nothing is removed while computing EBITDA.

I did something similar to cpk123:

CFO = NI + amortization - change in WC

CFO = EBIT - change in WC

CFO = EBITDA - taxes - interest - change in WC

Assuming taxes, interest, and change in WC are positive numbers, then EBITDA > CFO.

Thanks to both of u. Got it now.

Formulas aside, for a growing company where revenue is increasing but accounts receivable and inventory levels are increasing even faster (i.e., working capital is increasing), it takes a while before the accrual-based profit that a company is showing (e.g., EBITDA), catches up with the cash generated from operations (i.e., CFO). In other words, EBITDA doesn’t tell you anything about how long your customers are taking to pay you and how much you’ve had to invest in additional inventory, but increases in those accounts can crush a small company if it can’t finance it’s operations.