EBITDA vs Free Cash Flow: Profit Proxy vs Real Cash
Short answer. EBITDA is earnings before interest, taxes, depreciation and amortisation, a quick proxy for operating profit that ignores capital spending, working capital and taxes. Free cash flow is the cash a business has left after operating expenses and the capital spending needed to keep going. FCF is closer to what owners can actually take out.
Side by side
| EBITDA | Free cash flow | |
|---|---|---|
| What it shows | Operating profitability before financing and non-cash charges | Cash generated after reinvestment |
| Includes capital spending | No | Yes |
| Includes working-capital changes | No | Yes |
| Includes taxes and interest | No | Yes (interest and tax are paid out of operating cash flow or deducted, by definition) |
| Manipulation risk | Adjusted versions can flatter | Harder to flatter, though timing can move it |
| Used for | Valuation multiples such as EV/EBITDA, leverage ratios | Dividends, buybacks, debt paydown, DCF valuation |
| Weakness | Overstates cash for capital-heavy firms | Lumpy year to year |
Which one fits you?
Lean towards EBITDA if…
- you compare companies of different capital structures
- you need a quick operating-profit proxy
Lean towards Free cash flow if…
- you judge whether profits turn into cash
- you value a company with a discounted cash flow model
Frequently asked questions
Why is EBITDA criticised?
It adds back depreciation and ignores capex, so capital-intensive companies look healthier than their cash generation suggests.
How is free cash flow calculated?
Operating cash flow minus capital expenditures. Some versions also subtract stock-based compensation.
Which does Warren Buffett prefer?
He has criticised EBITDA for ignoring the capital spending a business needs; his ‘owner earnings’ idea is close to free cash flow.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.