Can someone please explain this relationship about EBIDTDA and WC

[heshoos]

“EBITDA Overestimates cash flow from operations if working capital is growing”

I am under the impression that CFO would be lower if a companies WC capital is growing… please help me understand

 

[Yayyywork]

Not positive I am understanding the phrasing correctly, but I believe it is using EBITDA as an estimator of CFO. If that is the case, EBITDA does not include changes to working capital. If you are increasing WC you would be burning more cash, thus if you were to use EBITDA as an estimator of CFO, EBITDA would be OVERESTIMATING what the actual CFA is.

 

[S2000magician]

heshoos wrote:”EBITDA Overestimates cash flow from operations if working capital is growing”
I am under the impression that CFO would be lower if a companies WC capital is growing… please help me understand

You’re correct.
That’s why EBITDA overestimates it: EBITDA doesn’t subtract the growth in WC to get to CFO.

 

[heshoos]

Thank you both!

 

[S2000magician]

My pleasure.