Can EBITDA be a better metric than operating cash flow? Yes, it can!

Does this mean that EBITDA is a better metric than cash flow metrics?

No.

But when these are paired, we get a more complete picture.

Here is an example:

A former blue-chip company has been severely affected by the recent market risks – supply chain issues, weak industry outlook, war in Ukraine, etc. The company’s sales almost halved in 2022 compared to 2019.

In 2022, the company posted a negative EBITDA. On the other hand, operating cash flow (OCF) was unaffected.

How come?

More detailed cash flow analysis showed that the company significantly accelerated collection of its receivables. The cash received earlier than expected enabled the company to repay its maturing debt.

But what is the problem with this?

It is not sustainable.

A brief calculation of what would OCF have amounted to if they had not sold those receivables shows a huge dip in underlying OCF. Without accelerating collection, they would have posted highly negative ALL cash flow metrics (OCF, FOCF, FCF) and they would not have been able to repay their debt.

Why is it not sustainable?

In 2023 they will have a difficult tasks of financing working capital and covering high fixed costs. It is a manufacturing company with a long operating cycle. This means – if they grow, they have to finance working capital needs, now even bigger than before as early collected receivables will be missing. If they shrink further, high fixed cost base will cost them a lot. Either way, they are in a difficult situation.

The likelihood of default – very high.

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The point:

If EBITDA turns negative, this is normally a problem, because the company cannot cover its operating costs.

If OCF turns negative, this does not necessarily have to be a problem (check one example here: https://creditanalyst.eu/koncar-group-the-risks-of-high-growth/).

In most cases, troubled companies will first have negative OCF, and then a couple of years later possibly a negative EBITDA.

But in this case, EBITDA was an earlier sign of troubles. If we had relied on OCF without digging deeper, we would have been misled.

This example highlights the importance of combining the cash flow analysis with other financial statements.

And digging deeper.

If you want CreditAnalyst.eu to dig deeper into the financial statements of your customers, suppliers, competitors, or your own company, drop an email to mario@creditanalyst.eu

CreditAnalyst.eu helps CEOs and CFOs improve their company’s cash flow through advanced financial statements analyses.