EBITDA vs. Cash Flow: What’s the Difference?

EBITDA vs. Cash Flow: What’s the Difference?

Finance professionals frequently refer to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a proxy for cash flow, but that’s not quite the full story. While both EBITDA and cash flow are often used together in financial analysis, they measure very different things.

What is EBITDA?

EBITDA is an estimate of a company’s profitability before interest, taxes, depreciation, and amortization.

At a glance, EBITDA strips out non-cash expenses (like depreciation and amortization) and excludes financing and tax decisions (interest and taxes), which can vary across companies. That makes it easier to compare different companies’ operating performances.

So, when analysts or investors want a quick view of a company’s core operating profitability, EBITDA gets the job done. Here’s why:

• No depreciation/amortization: These are accounting charges for past investments (like equipment or software), not current cash outflows.
• No interest or taxes: These depend on capital structure and tax jurisdictions, not on how well the business operates.

This stripped-down version gives a cleaner look at how much income the business might generate before obligations.

But here’s the catch: EBITDA isn’t a GAAP or IFRS-recognized metric. Companies aren’t required to report it, and there’s no universally accepted formula. That means one company’s EBITDA might not be directly comparable to another company’s unless you know exactly how it’s being calculated. It’s still widely used in finance, but it’s always worth checking the details.

You can calculate EBITDA using the income statement (unless depreciation and amortization are not shown as a line item, in which case these can be found on the cash flow statement).  

What is Cash Flow?

Operating cash flow is a GAAP- and IFRS-compliant measure reported directly on the cash flow statement as “cash flow from operations”. Operating cash flow shows actual cash generated or spent by business operations for a specific period. 

Depreciation and amortization, along with other non-cash items, are added back to cash from operations. Non-cash items include stock-based compensation, unrealized gains/losses, or write-downs.

Cash from operations also includes changes in net working capital items, such as accounts receivable, accounts payable, and inventory. However, cash from operations does not include capital expenditures (the investment required to maintain capital assets).

When finance professionals refer to EBITDA as a proxy for “cash flow,” they typically mean cash flow from operations, or operating cash flow. However, cash from operations captures vital elements, such as working capital changes, which can make it significantly different from EBITDA.

EBITDA vs. Operating Cash Flow: Key Differences

Real-World Example: EBITDA vs. Cash Flow

The following example shows how EBITDA vs. Cash Flow can significantly differ, even though both metrics reflect a company’s operating performance.

A fictional company called FuturaTech just wrapped up a solid year, reporting the following financial results:

• Net Income: $1,800 
• Depreciation & Amortization: $1,500
• Interest Expense: $300 
• Income Tax Expense: $400

(All figures are in thousands)

To calculate EBITDA, we simply add back interest, taxes, and non-cash depreciation and amortization to net income:

That $4 million EBITDA paints a picture of healthy operational profitability. But it’s not the whole picture.

What About Actual Cash?

When we shift focus to operating cash flow, we get a different story. Here’s what FuturaTech’s cash flow statement shows:

Despite $4 million in EBITDA, the business only generated $2.1 million in actual cash from operations. That’s nearly half.

EBITDA vs. Operating Cash Flow: Side-by-Side

Why the Difference Matters

EBITDA assumes clean operations, no delays in collections, no inventory buildup, and no day-to-day inefficiencies or delays in converting accounting profits into actual cash. But real businesses rarely work that way.

In FuturaTech’s case:

• $1 million in customer payments hadn’t been collected yet (increase in A/R).
• $800K went to stocking up on inventory.
• Only some of that cash was offset by delaying payments to suppliers (+$600K in A/P).

These working capital movements don’t affect EBITDA, but they absolutely affect cash flow.

EBITDA vs. Cash Flow: Key Takeaways and Next Steps

As the FuturaTech example demonstrates, EBITDA vs. Cash Flow can vary significantly in practice. EBITDA is helpful for standardizing profitability and comparing companies, especially in financial modeling, comparable company analysis, and valuation. Operating cash flow gives you a picture of actual cash generated by a company’s operations. If you’re doing deep financial analysis or thinking like a lender or investor, operating cash flow is usually a more reliable number.

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Additional Resources

The Ultimate Cash Flow Guide (EBITDA, CF, FCF, FCFE, FCFF)

DCF Model Training Free Guide

NTM EBITDA: Meaning, Formula, and How to Use It

See all Valuation resources