Can free cash flow be higher than EBITDA?
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😎 is it possible for free cashflow to be higher than EBITDA? Isn’t normally lower?
🤖 Yes, it is possible for free cash flow (FCF) to be higher than Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). In fact, it’s quite common for FCF to differ from EBITDA, and there are several reasons why FCF might be higher:
1. Capital Expenditures (CapEx): EBITDA represents earnings before accounting for capital expenditures (CapEx), which are investments in property, plant, equipment, and other long-term assets. FCF takes CapEx into account by subtracting it from the operating cash flow. If a company has low or no CapEx requirements relative to its EBITDA, FCF can be higher.
2. Depreciation and Amortization: EBITDA adds back depreciation and amortization expenses, which are non-cash expenses. FCF does not add these expenses back, so if a company has significant depreciation and amortization expenses relative to its EBITDA, FCF can be higher.
3. Working Capital Changes: FCF considers changes in working capital, such as changes in accounts receivable, accounts payable, and inventory. If a company experiences positive changes in working capital, it can contribute to higher FCF even if EBITDA is lower.
4. Interest and Taxes: EBITDA excludes interest and taxes, while FCF takes them into account. If a company has lower interest expenses or tax payments, it can lead to higher FCF compared to EBITDA.
5. Non-operating Items: EBITDA focuses on operating income, while FCF considers all cash flows, including non-operating items like asset sales, investments, and other one-time events. These non-operating items can impact FCF differently from EBITDA.
In summary, the relationship between FCF and EBITDA can vary significantly depending on a company’s specific financial circumstances, capital structure, and accounting practices. FCF provides a more accurate picture of a company’s ability to generate cash after accounting for necessary investments and working capital changes, whereas EBITDA is a measure of operating profitability.
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