156012

Why does EBITDA equal cash?

One misconception of earnings before interest expenses, taxes, depreciation and amortization. Also known as EBITDA (Earnings before interest, taxes, depreciation and amortization) is understood as an increase in cash in a given accounting period. Or say it’s cash profit. This is a misunderstanding because EBITDA does not include the effect of many cash items.

EBITDA is a financial and accounting term. which is widely used in business circles It is also used as a tool for valuation of the enterprise. EBITDA is calculated from earnings before interest expense (EBIT) plus depreciation and amortization. (Depreciation and Amortization), which are non-cash accounting expenses, therefore add back.

So how do we earn cash profits? We can find it from the cash flow statement. Operating cash flow, which indicates the profitability of the company. in cash It shows whether the company has more or less cash in operating activities. This is different from accrual EBITDA through the addition of single non-cash items such as depreciation and amortization. (Depreciation and Amortization)

The weakness of EBITDA is that it does not include the impact of changes in working capital, which includes changes in current assets such as trade accounts receivable. inventories, etc. and current liabilities such as trade accounts payable Accrued expenses, etc., which activities in working capital affect the change in cash.

Finally, positive EBITDA does not always mean that in an entity’s accounting period there will always be positive cash flows from operating activities. It may not be sufficient to analyze the increase in cash.