EBITDA is often used and confused as a proxy for operating cash flow but there are two reasons EBITDA does not equal cash flow.
But first understand that EBITDA is used throughout the business community from valuation multiples to covenants in credit agreements. It is the standard metric in the business world when discussing the performance of a business because it allows comparison of different companies by canceling the effects of capital, financing and tax structures.
Operating cash flow is a measure of the amount of cash generated by operations of the company. It indicates whether a company can generate sufficient cash flow to maintain or grow its operations or whether external financing is required.
In my opinion, the two reasons EBITDA does not equal cash flow is that:
1) EBITDA does not consider the fluctuation in working capital accounts (current assets – current liabilities) as a business grows or contracts
2) EBITDA does not consider capital expenditures required to support a business’ infrastructure.
EBITDA will most likely always be the dominant business metric for evaluating the performance of a business. But it should never be confused with cash flow as many other factors need to be considered.