Does this mean that EBITDA is a better metric than cash flow metrics?
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.
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.
If EBITDA turns negative, this is normally a problem, because the company cannot cover its operating costs.
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