CPA Bill Hanna explains why EBITDA and operating cash flow measure different things. EBITDA shows core profitability by adding back interest, taxes, depreciation, and amortization to net income. OCF shows actual cash generated, accounting for working capital changes like inventory and receivables.
EBITDA versus operating cash flow. What is the difference? EBITDA is earnings before interest, tax, depreciation, and amortization, and it tells us about the profitability of the business. Operating cash flow, that tells us about the liquidity of the business or its ability to generate cash. What is the formula for both of them? For EBITDA, the formula goes net income plus interest, taxes, depreciation, amortization. We get to EBITDA. The formula for operating cash flow begins with net income, adds non-cash expenses like depreciation, amortization, non-cash stock-based comp expenses, and then it adds or subtracts the working capital changes, changes in accounts payable, receivable, and inventory, and it arrives at operating cash flow. So EBITDA tells us whether the core operation of the business is profitable, while OCF tells us whether the business is able to generate the cash. If you want to learn more Finance Bytes from me, follow the channel.
