{"id":28312,"date":"2024-02-21T13:13:39","date_gmt":"2024-02-21T18:13:39","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=28312"},"modified":"2024-09-14T21:03:46","modified_gmt":"2024-09-15T02:03:46","slug":"ebitda","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/","title":{"rendered":"EBITDA: How to Calculate EBITDA and Advantages and Disadvantages"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">EBITDA Tutorial<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/#EBITDA_Definition\">EBITDA Definition<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/#How_to_Calculate_EBITDA_in_More_Detail\">How to Calculate EBITDA in More Detail<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/#What_Does_EBITDA_Mean\">What Does EBITDA Mean?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/#Is_EBITDA_Close_to_a_Companys_Cash_Flow_from_Operations\">Is EBITDA Close to a Company\u2019s Cash Flow from Operations?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/#How_to_Make_EBITDA_More_Accurate\">How to Make EBITDA More Accurate<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/#The_Final_Word_on_EBITDA_Pros_and_Cons\">The Final Word on EBITDA: Pros and Cons<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2 id=\"intro\"><span class=\"ez-toc-section\" id=\"EBITDA_Definition\"><\/span><strong>EBITDA Definition<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<blockquote><p><strong>EBITDA Definition:<\/strong> EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a proxy for a company\u2019s core, recurring business cash flow from operations before the impact of capital structure, taxes, and re-investment.<\/p><\/blockquote>\n<p>One interpretation of EBITDA, courtesy of Paulie from <em>The Sopranos<\/em>, is as follows:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28313 size-full\" title=\"Paulie - Definition of EBITDA\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130730\/01-Paulie-EBITDA-Definition.jpg\" alt=\"Paulie - Definition of EBITDA\" width=\"1538\" height=\"1728\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130730\/01-Paulie-EBITDA-Definition.jpg 1538w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130730\/01-Paulie-EBITDA-Definition-267x300.jpg 267w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130730\/01-Paulie-EBITDA-Definition-911x1024.jpg 911w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130730\/01-Paulie-EBITDA-Definition-768x863.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130730\/01-Paulie-EBITDA-Definition-1367x1536.jpg 1367w\" sizes=\"(max-width: 1538px) 100vw, 1538px\" \/><\/p>\n<p>To calculate EBITDA, start with <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebit-operating-income\/\" target=\"_blank\" rel=\"noopener\">Operating Income or EBIT<\/a> on the Income Statement and then add the Depreciation &amp; Amortization (D&amp;A) <u>from the Cash Flow Statement<\/u>.<\/p>\n<p>You add back D&amp;A because it represents the <strong>allocation of spending on long-term assets (factories, buildings, IP, etc.) from previous periods<\/strong>.<\/p>\n<p>In other words, the company <em>has already spent money<\/em> on the items represented by D&amp;A, so they do not represent cash outflows <em>in the current period<\/em>.<\/p>\n<p><strong>You must use the D&amp;A number shown on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a><\/strong> \u2013 if not, you might not capture the full amount.<\/p>\n<p>Many companies do not list the full D&amp;A expense on their Income Statements, or they embed it within other expenses there.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>To calculate EBITDA for a company like Target, we would follow this approach and take the Operating Income on the Income Statement and add D&amp;A on the Cash Flow Statement:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28314 size-full\" title=\"Target - EBITDA Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130757\/02-Target-EBITDA-Calculation.jpg\" alt=\"Target - EBITDA Calculation\" width=\"1632\" height=\"1046\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130757\/02-Target-EBITDA-Calculation.jpg 1632w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130757\/02-Target-EBITDA-Calculation-300x192.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130757\/02-Target-EBITDA-Calculation-1024x656.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130757\/02-Target-EBITDA-Calculation-768x492.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130757\/02-Target-EBITDA-Calculation-1536x984.jpg 1536w\" sizes=\"(max-width: 1632px) 100vw, 1632px\" \/><\/p>\n<p>If you have additional time and resources and want to go beyond this, you could also look for <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/\" target=\"_blank\" rel=\"noopener\">non-recurring expenses<\/a> in the financial statements and add these to calculate EBITDA.<\/p>\n<p>In this case, Target does not appear to have any immediately obvious non-recurring expenses that <em>affect its Operating Income<\/em>, but it may have some embedded within its line items if we review the filings in more detail.<\/p>\n<p>On the other hand, a company like Steel Dynamics has an obvious non-recurring charge we should add back when calculating EBITDA in one of its historical Income Statements:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28315 size-full\" title=\"EBITDA - Non-Recurring Add-Backs\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130821\/03-STLD-EBITDA-Calculation.jpg\" alt=\"EBITDA - Non-Recurring Add-Backs\" width=\"1755\" height=\"1050\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130821\/03-STLD-EBITDA-Calculation.jpg 1755w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130821\/03-STLD-EBITDA-Calculation-300x179.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130821\/03-STLD-EBITDA-Calculation-1024x613.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130821\/03-STLD-EBITDA-Calculation-768x459.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130821\/03-STLD-EBITDA-Calculation-1536x919.jpg 1536w\" sizes=\"(max-width: 1755px) 100vw, 1755px\" \/><\/p>\n<p>People often criticize EBITDA because it differs from Cash Flow from Operations \u2013 even though it is supposed to be a proxy for \u201crecurring business cash flow from operations.\u201d<\/p>\n<p>This is a fair criticism, but it misses the point because the <strong>true purpose of EBITDA is to compare companies quickly and simply<\/strong>.<\/p>\n<p>If you want estimates of their \u201ctrue cash flows,\u201d you must adjust the standard EBITDA calculation or use alternate metrics (see below).<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/EBITDA\/105-32-EBITDA.xlsx\" target=\"_blank\" rel=\"noopener\">EBITDA and Cash Flow from Operations for Target and Best Buy (XL)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/EBITDA\/105-32-EBITDA-Slides.pdf\" target=\"_blank\" rel=\"noopener\">EBITDA &#8211; Slide Presentation (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/EBITDA\/105-32-Best-Buy-10-K-Extracts.pdf\" target=\"_blank\" rel=\"noopener\">Best Buy &#8211; 10-K Extracts (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/EBITDA\/105-32-Target-10-K-Extracts.pdf\" target=\"_blank\" rel=\"noopener\">Target &#8211; 10-K Extracts (PDF)<\/a><\/p>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<p><strong>0:00:<\/strong> Introduction<br \/>\n<strong>4:56:<\/strong> Part 1: How to Calculate EBITDA in More Detail<br \/>\n<strong>7:06:<\/strong> Part 2: What Does EBITDA Mean?<br \/>\n<strong>8:41:<\/strong> Part 3: Is EBITDA Close to Cash Flow from Operations?<br \/>\n<strong>10:16:<\/strong> Part 4: The Pros and Cons of EBITDA<br \/>\n<strong>11:11:<\/strong> Recap and Summary<\/p>\n<h2 id=\"definition\"><span class=\"ez-toc-section\" id=\"How_to_Calculate_EBITDA_in_More_Detail\"><\/span><strong>How to Calculate EBITDA in More Detail<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>First, note that when calculating EBITDA, you should only add back <strong>non-recurring expenses<\/strong> \u2013 not <em>non-cash expenses<\/em>.<\/p>\n<p>For example, Stock-Based Compensation is a non-cash expense, but it is clearly recurring for most companies, and, unlike D&amp;A, <em>it affects the company\u2019s share count<\/em>.<\/p>\n<p>Therefore, you should <strong>not<\/strong> add it back to EBITDA.<\/p>\n<p>Adding back D&amp;A is justified because it represents a simple timing difference, not a changed share count or capital structure.<\/p>\n<p>Also, you should add back items only if <em>they have affected Operating Income<\/em>, which explains why Gains and Losses are not part of the adjustments.<\/p>\n<p>Yes, they are non-recurring, but they normally appear within \u201cOther Income \/ (Expenses)\u201d on the Income Statement, which is below the Operating Income line.<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28316 size-full\" title=\"Target - Cash Flow Statement Add-Backs\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130923\/04-Target-CFS-Addbacks.jpg\" alt=\"Target - Cash Flow Statement Add-Backs\" width=\"1255\" height=\"862\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130923\/04-Target-CFS-Addbacks.jpg 1255w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130923\/04-Target-CFS-Addbacks-300x206.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130923\/04-Target-CFS-Addbacks-1024x703.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130923\/04-Target-CFS-Addbacks-768x528.jpg 768w\" sizes=\"(max-width: 1255px) 100vw, 1255px\" \/><\/p>\n<p>Finally, be careful with \u201callegedly non-recurring expenses that are actually recurring,\u201d such as Restructuring for many companies.<\/p>\n<p>For example, Best Buy lists &#8220;Restructuring&#8221; as a separate line on its statements, but is it truly non-recurring? We\u2019d say \u201cno\u201d because it appears in 3 out of the 3 past years:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28317 size-full\" title=\"Best Buy - Restructuring Charges\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130949\/05-Best-Buy-Restructring.jpg\" alt=\"Best Buy - Restructuring Charges\" width=\"1394\" height=\"734\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130949\/05-Best-Buy-Restructring.jpg 1394w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130949\/05-Best-Buy-Restructring-300x158.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130949\/05-Best-Buy-Restructring-1024x539.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21130949\/05-Best-Buy-Restructring-768x404.jpg 768w\" sizes=\"(max-width: 1394px) 100vw, 1394px\" \/><\/p>\n<h2 id=\"ER\"><span class=\"ez-toc-section\" id=\"What_Does_EBITDA_Mean\"><\/span><strong>What Does EBITDA Mean?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>EBITDA is a way to <em>compare<\/em> the core cash flows of different companies while ignoring their capital structure, tax, and re-investment differences.<\/p>\n<p>Sometimes, you want to do this, such as in benchmarking analysis or a quick screen for <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/comparable-company-analysis-cca\/\" target=\"_blank\" rel=\"noopener\">comparable public companies<\/a>.<\/p>\n<p>But in other cases, you want to do the opposite and <em>reflect<\/em> these differences to capture the company\u2019s true cash flows and ability to service debt, make acquisitions, and return capital to shareholders.<\/p>\n<p>EBITDA can tell you whether the company\u2019s core business is growing, declining, or becoming more\/less profitable &#8211; and what drives these changes.<\/p>\n<p>It\u2019s most meaningful when you\u2019re looking at <strong>similarly sized companies in the same industry<\/strong> and benchmarking their profitability or ability to service Debt.<\/p>\n<p>For example, we can compare EBITDA for Target and Best Buy:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28318 size-full\" title=\"Target vs. Best Buy - EBITDA Comparison\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131015\/06-Target-vs-Best-Buy-EBITDA-Comparison.jpg\" alt=\"Target vs. Best Buy - EBITDA Comparison\" width=\"1820\" height=\"662\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131015\/06-Target-vs-Best-Buy-EBITDA-Comparison.jpg 1820w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131015\/06-Target-vs-Best-Buy-EBITDA-Comparison-300x109.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131015\/06-Target-vs-Best-Buy-EBITDA-Comparison-1024x372.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131015\/06-Target-vs-Best-Buy-EBITDA-Comparison-768x279.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131015\/06-Target-vs-Best-Buy-EBITDA-Comparison-1536x559.jpg 1536w\" sizes=\"(max-width: 1820px) 100vw, 1820px\" \/><\/p>\n<p>Target has slightly higher margins, indicating greater efficiency, but it also has less capacity to issue new debt since it already has a substantial balance with significant interest each year.<\/p>\n<p>You can assess this via metrics such as Debt \/ EBITDA and EBITDA \/ Interest, which are used in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/debt-vs-equity-analysis\/\" target=\"_blank\" rel=\"noopener\">debt vs. equity analysis<\/a>.<\/p>\n<p>You can also create <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/valuation-multiples\/\" target=\"_blank\" rel=\"noopener\">valuation multiples<\/a> based on EBITDA, such as the Enterprise Value \/ EBITDA or TEV \/ EBITDA multiple (see our <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/ebit-vs-ebitda\/\" target=\"_blank\" rel=\"noopener\">EBIT vs. EBITDA vs. Net Income<\/a> comparison article).<\/p>\n<h2 id=\"myths\"><span class=\"ez-toc-section\" id=\"Is_EBITDA_Close_to_a_Companys_Cash_Flow_from_Operations\"><\/span><strong>Is EBITDA Close to a Company\u2019s Cash Flow from Operations?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Famous investors like Warren Buffet have criticized EBITDA for excluding Capital Expenditures and other line items that significantly impact a company\u2019s cash flows.<\/p>\n<p>And they\u2019re correct!<\/p>\n<p>Even if you ignore the CapEx issue and focus on Cash Flow from Operations (CFO) rather than <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow<\/a>, since CFO also ignores CapEx, EBITDA is <strong>rarely close<\/strong> to CFO:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28319 size-full\" title=\"EBITDA vs. Cash Flow from Operations\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131040\/07-EBITDA-vs-CFO.jpg\" alt=\"EBITDA vs. Cash Flow from Operations\" width=\"1044\" height=\"1276\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131040\/07-EBITDA-vs-CFO.jpg 1044w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131040\/07-EBITDA-vs-CFO-245x300.jpg 245w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131040\/07-EBITDA-vs-CFO-838x1024.jpg 838w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131040\/07-EBITDA-vs-CFO-768x939.jpg 768w\" sizes=\"(max-width: 1044px) 100vw, 1044px\" \/><\/p>\n<p>While EBITDA and CFO are similar because both metrics deduct <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cogs\/\" target=\"_blank\" rel=\"noopener\">COGS<\/a> and Operating Expenses and add back D&amp;A, <strong>there are also many differences:<\/strong><\/p>\n<p>-The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a> can be significant for retail\/manufacturing companies.<\/p>\n<p>-The lack of subtraction for Taxes within EBITDA is another huge difference.<\/p>\n<p>-The Interest Expense also makes a difference for any company with significant Debt.<\/p>\n<h2 id=\"work\"><span class=\"ez-toc-section\" id=\"How_to_Make_EBITDA_More_Accurate\"><\/span><strong>How to Make EBITDA More Accurate<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If you want to bring EBITDA closer to Cash Flow from Operations or Free Cash Flow, you can use a variant such as EBITDA \u2013 CapEx or EBITDA \u2013 CapEx +\/- Change in Working capital:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28320 size-full\" title=\"Variants of the EBITDA Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131104\/08-EBITDA-Cash-Flow-Adjustments.jpg\" alt=\"Variants of the EBITDA Calculation\" width=\"1212\" height=\"987\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131104\/08-EBITDA-Cash-Flow-Adjustments.jpg 1212w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131104\/08-EBITDA-Cash-Flow-Adjustments-300x244.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131104\/08-EBITDA-Cash-Flow-Adjustments-1024x834.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/02\/21131104\/08-EBITDA-Cash-Flow-Adjustments-768x625.jpg 768w\" sizes=\"(max-width: 1212px) 100vw, 1212px\" \/><\/p>\n<p>You could even deduct the Cash Taxes (i.e., Book Taxes minus the Deferred Tax component on the CFS).<\/p>\n<p><strong>However, the more adjustments you make, the less useful EBITDA is as a quick and simple comparison metric<\/strong>.<\/p>\n<p>So, if you want accurate cash flows, consider metrics such as Free Cash Flow or <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a> instead.<\/p>\n<h2 id=\"report\"><span class=\"ez-toc-section\" id=\"The_Final_Word_on_EBITDA_Pros_and_Cons\"><\/span><strong>The Final Word on EBITDA: Pros and Cons<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>EBITDA is just a tool; like any tool, it has good and poor uses.<\/p>\n<p>People who criticize it for its shortcomings have a point, but in most cases, <strong>they do not understand its true purpose.<\/strong><\/p>\n<p>EBITDA is quick and simple to calculate, lets you easily compare companies, and is universally known in finance.<\/p>\n<p>On the other hand, even though it purports to be a \u201cproxy for cash flow\u201d (with many adjustments), it is not close to Cash Flow from Operations or Free Cash Flow in most cases.<\/p>\n<p>And unlike what Paulie stated in <em>The Sopranos<\/em>, it\u2019s not exactly \u201cthe true picture of a company\u2019s profitability.\u201d<\/p>\n<p>It\u2019s closer to \u201cthe true picture of a company\u2019s <em>cash flows<\/em>, ignoring its taxes, capital structure, and business re-investment requirements.\u201d<\/p>\n<p>If you squint, you could argue this definition still represents profitability, but it\u2019s a bit of a stretch.<\/p>\n<p>That said, <em>The Sopranos<\/em> was right about one thing: <strong>If you don\u2019t even <em>know<\/em> your EBITDA, do not sell your business!<\/strong><\/p>\n<p>While it may not be the be-all-end-all for valuation, it is still very important when valuing companies and pricing deals.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a proxy for a company\u2019s core, recurring business cash flow from operations before the impact of capital structure, taxes, and re-investment.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-28312","biws_kb","type-biws_kb","status-publish","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/28312","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=28312"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}