Cash Flow & EBITDA: Similar indicators but they are not the same

The EBITDA is an acronym that responds to Earnings Before Interest, Taxes, Depreciation, and Amortization. This indicator has consolidated, in the last years, like the indicator more used to measure the operative yield of a company. Why?

Countable benefit, that is measurement that habitually has considered, is in fact one “fiction” and can hide-and-seek, in his calculation, different assumptions that distorts utility since nor it reflects the operational efficiency (when including the financial cost, that it depends on the structure of financing of the company, or the amortizations that depend on the plan of amortization that each company decides or on the type of equipment that it requires), nor is an estimation of the cash flow (since the amortizations and depreciations are a cost that does not suppose payment).

The EBITDA has the advantage, therefore, to eliminate the slant of the financial structure, the fiscal surroundings (through the taxes) and of “the fictitious” expenses (amortizations). Of this form, it allows to obtain a clear idea of the operational efficiency of the companies, and to compare badly of one more a more suitable form or that makes different companies or sectors in the purely operative scope.

A quite common error is to consider the EBITDA like a measurement of the cash flow of the company. The error comes from the fact that the interests and the taxes are real expenses, and therefore excellent in the calculation of the box flow. It either does not consider the realized investments (that according to the sector, for example the technological one, can get to be very excellent) or the capital variations that also have impact in the cash flow. To tie EBITDA and cash flow also would suppose to assume that all the sales are received, all the debts are pleased, and everything what it is bought sells. Which evidently is not true.

In this sense, many criticize the EBITDA like “a malleable” indicator, in whose calculation different assumptions can be realized, and that therefore can serve to make up the true results of an organization. Which, facing carrying out investment decisions, can be fatal since in financial terms, unique the excellent thing is the cash flow: the money that really generates a company and that can serve to recover the realized investment. The problem is that the EBITDA is an indicator reasonably simple to calculate, whereas the cash flow demands to spin finer.

Like conclusion, it would be necessary to say that the EBITDA is a good indicator if it is used with precaution and so it is designed, and it is an enormously dangerous indicator if it is taken like unique measurement of the capacity of a company to generate “cash”. That it is what matters.