EBITDA overestimates cash flow from operations if working capital is growing.
How come?
Chetan GoyalThe Official Nerd
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CFO captures the changes in working capital accounts. If working capital is increasing (CA increase more than CL), then the firm is using cash to build up those CA’s. EBITDA does not capture the changes in working capital accounts, hence, it overstates CFO.
Assume that receivables increased on $100, so revenues will increase on $100 and also EBITDA will increase on $100. Cash flow will increase $0 on that transaction.