Is EBITDA Higher Than Cash Flow?

Imagine this: a highly successful business, one that shows increasing revenue every year, a dominant position in its industry, and impressive profitability metrics. Its EBITDA is rising at a stellar rate, yet the cash flow statement tells a completely different story. The company is scrambling to pay its bills, cutting corners on crucial investments, and burning through its cash reserves at a frightening pace. How is it possible that EBITDA—often hailed as a great indicator of profitability—is so much higher than cash flow?

Here’s the twist: EBITDA doesn’t tell you everything. In fact, it can sometimes paint an overly rosy picture of a company’s financial health. Cash flow, on the other hand, is the true pulse of a business. You can't pay your employees or suppliers with EBITDA, but cash flow? That's the lifeblood of day-to-day operations.

But wait—EBITDA is an important metric, right? Yes, it is! For investors and analysts, EBITDA can be a useful measure of a company’s operating performance. It strips out the impact of taxes, interest, depreciation, and amortization, which can give a clearer picture of the core profitability of the business. It’s a great starting point to analyze financial performance, but it shouldn't be mistaken for cash flow, which is what truly keeps a business afloat.

Here’s where the drama builds: companies can post impressive EBITDA numbers while facing a cash flow crisis. How? They might have significant non-cash expenses (like depreciation) that don’t impact EBITDA, but these same companies could be hemorrhaging cash due to capital expenditures, rising interest payments, or unsustainable debt levels.

Now, let’s break it down into three reasons why EBITDA might outpace cash flow:

1. Capital Expenditures
EBITDA doesn’t account for the costs associated with maintaining or expanding a company’s physical assets. A company with heavy capital expenditures, like a manufacturing business or tech company investing in new data centers, could have a high EBITDA but very low free cash flow. Cash is going out the door to invest in property, plants, equipment, or R&D, while EBITDA blissfully ignores these costs.

For instance, a company with an EBITDA of $100 million might spend $80 million on new factories. While EBITDA looks healthy, cash flow is quickly drying up.

2. Working Capital Requirements
EBITDA also overlooks changes in working capital. Businesses often need to spend cash to build inventory, extend credit to customers, or pay suppliers upfront. If a company has growing accounts receivable or inventory levels, it might report high EBITDA but struggle with liquidity issues. Imagine a retail company that shows fantastic EBITDA growth but can’t collect payments from its customers in time to meet payroll.

3. Debt and Interest Payments
EBITDA excludes interest payments, but businesses don’t get a pass on paying back loans. A company with high EBITDA but a large amount of debt could be drowning in interest payments. This is particularly true for businesses with leveraged buyouts, where aggressive borrowing inflates EBITDA without regard for the real cash flow needed to service that debt.

Data Analysis: EBITDA vs. Cash Flow
To illustrate this gap, let’s look at a simplified table comparing a hypothetical company's EBITDA and cash flow over a few years:

Year	EBITDA (in millions)	Cash Flow (in millions)	CapEx (in millions)	Debt Payments (in millions)
2020	150	90	40	20
2021	180	70	60	30
2022	200	50	80	40

In this scenario, while EBITDA grows from $150M to $200M over three years, cash flow consistently declines due to rising capital expenditures and debt payments. The EBITDA figure gives the illusion of growth and profitability, but cash flow shows a very different, much grimmer story.

Now let’s take this one step further: Why does EBITDA look so tempting? It’s a simple number that strips out variables many consider non-operational (taxes, interest, depreciation). It’s easy to compare across industries and companies, and it doesn’t fluctuate as much as cash flow might. But that simplicity is also its greatest flaw. EBITDA ignores the realities of operating a business, like paying for assets, managing debt, and keeping the lights on.

Conclusion: The EBITDA Myth vs. Cash Flow Reality
EBITDA, for all its utility, can be dangerously misleading. Cash flow is what keeps a business solvent, pays employees, and allows for future growth. When a company’s EBITDA is significantly higher than its cash flow, it should raise alarm bells. Investors should dig deeper, looking beyond EBITDA to assess whether the company has the liquidity to survive and thrive.

At the end of the day, if EBITDA is the flashy sports car, cash flow is the fuel. A company might look great from a distance, but without enough cash flow, it will eventually stall out.

So, is EBITDA higher than cash flow? In many cases, yes—but that’s not always a good thing. Cash flow is what truly matters for long-term success.