There are potential problems in using the EDITDA figure. The EBITDA leaves out of lot of expenses in the final figure, so it may not be a realistic view of a company’s profitability. It also does not measure the actual cash that is flowing into the company because of the figures that it leaves out.
There are a few factors that the EBITDA neglects. These include the money required for working capital, fixed expenses and other debt payments and capital expenditures. In every business, capital expenditures are a crucial, ongoing expense. However, this is not factored into the EBITDA figure, so investors need to be wary when using the EBITDA figure as a basis for a profit margin.
There are more reliable ways for investors to calculate a company's cash income. They can use the Free Cash Flow (FCF) system. The FCF is calculated by simply deducting capital expenditures from the business cash flow figure. This takes into account at least three of the factors that the EBITDA leaves out: inventory, receivables and capital expenditures such as property and equipment.
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