EBITDA vs Cash Flow: Key Differences, Formulas and Examples

There are times when a business’s financial statements show profitability, while in reality, bank accounts are low or empty. This is exactly why people compare EBITDA vs cash flow.

At the top level, EBITDA is a measure of operating performance – i.e. how profitable your core business operations are – while cash flow is about actual cash moving in and out of the business.

Let’s unpack the main differences and a couple of handy examples you can use in real-world cash flow analysis.

What is EBITDA?

EBITDA stands for earnings before interest, taxes, depreciation, and amortisation. It’s a way of estimating your company’s operational profitability from its main operations by stripping out:

• Interest expenses, which depend on your capital structure and net debt.
• Taxes, which depend on tax strategies and timing.
• Depreciation and amortisation, as well as other non-cash items such as amortisation expenses and, depending on some businesses, stock-based compensation.

Because it focuses on core business activities, EBITDA can be used to compare companies with different capital structures (e.g. one business has big loans, another doesn’t) and different accounting or tax settings. That’s why it shows up in bank covenants (agreement conditions) and credit agreements.

But here’s the catch: EBITDA is not cash. It’s a performance metric, not a money-in-the-bank metric.

EBITDA formula and how to calculate it

There are a few ways to calculate EBITDA, depending on what you have in front of you and how your accounting practices present the numbers under generally accepted accounting principles. A popular version is:

EBITDA = Net income + Interest expense + Taxes + Depreciation and amortisation

That’s essentially adjusting net income back up by adding back costs that aren’t part of the day-to-day business trading performance. Another option is:

EBITDA = Operating profit (or operating income) + Depreciation and amortisation

Doing it this way starts from operating profit on the income statement, then adds back D&A.

EBITDA can also be presented with ‘add-backs’ for some non-operational factors (e.g. one-off restructure costs). Be careful here, though, because the more add-backs you use, the more EBITDA becomes a product of financing and accounting decisions rather than a proper view of performance.

What is cash flow and where can you find it?

Cash flow is the money that actually moves through your business over a set period – the cash generated and the cash outflows you’ve paid. The best place to see it is the cash flow statement, and most statements will break down cash movements into three buckets:

• Operating cash flow: Cash tied to normal trading in your company’s operations.
• Investing cash flow: Cash spent on or received from capital investments, buying/selling equipment, selling assets, etc.
• Financing cash flow: Cash from loans, equity injections and cash used for loan repayments and dividend payments.

A business can show positive cash flow overall and still be under pressure if its operating cash flow is weak, or if it has chunky short-term cash flow demands coming up.

Operating cash flow versus free cash flow

Two cash flow numbers you’ll hear a lot in cash flow vs profitability discussions are:

• Operating cash flow: Cash generated by the core business operations after considering working capital movements (i.e. accounts receivable and accounts payable) and other operating payments.
• Free cash flow (FCF): The cash left after the business funds the capital spend it needs to keep operating and grow.

A basic free cash flow formula is:

Free cash flow = operating cash flow – capital expenditures

In other words, you subtract capital expenditures (capex) from the cash your business generates through trading. Why does this matter? Because capex is the real-world ‘cash drain’ that EBITDA doesn’t capture. Depreciation is an accounting expense, whereas capex is a real payment.

Differences between EBITDA and cash flow

EBITDA and cash flow tend to move in the same direction over time, but they can diverge in the short term. Here’s what usually drives that gap:

1. EBITDA looks at operating performance, cash flow at liquidity

EBITDA focuses on operating performance and how the business trades. Cash flow looks at whether you can actually pay bills and stay steady through economic downturns.

2. EBITDA ignores working capital, cash flow doesn’t

Cash flow is heavily impacted by working capital movements. If customers pay late, accounts receivable rises and cash can fall even if profit looks fine. If you wait to pay suppliers, accounts payable rises and cash might look better (but only temporarily).

3. EBITDA ignores capex, free cash flow doesn’t

EBITDA doesn’t care whether you spent $2,000 or $200,000 on equipment. But your cash does. Free cash flow is where capital expenditures and capital investments hit home.

4. Capital structure matters more for cash flow

Two businesses with the same EBITDA can have very different cash outcomes depending on net debt, debt repayments, interest costs, and other financing activities. This is the capital structure effect in the real world.

Examples of when EBITDA and cash flow tell different stories

Here are a couple of examples that will help you understand the difference between EBITDA and cash flow:

Example 1: Strong EBITDA, negative cash flow

A small services business has the following for the month:

• Sales: $120,000
• Operating expenses (wages, rent, software, etc.): $90,000
• Depreciation: $5,000
• Interest: $2,000
• Tax (accrued): $3,000

On the income statement, you might see:

• Operating income: $30,000
• Add back depreciation ($5,000) to get EBITDA equalling $35,000

So far, so good – strong company’s earnings and solid operational performance. But now look at the cash reality:

• Customers were slow to pay and accounts receivable increased by $25,000
• You paid down a business loan of $8,000
• You bought equipment worth $12,000

The cash view now looks like:

• Start with cash flow from operations: EBITDA $35,000
• Adjust for working capital: minus $25,000 (receivables)
• Other operating cash items (say tax actually paid this month is $0 because it’s not due yet)

Operating cash flow is roughly $10,000. Then subtract capital expenditures of $12,000. Free cash flow is now a negative cash flow of about –$2,000. That’s the classic ‘profitable but cash-tight’ situation. Your company’s ability to meet near-term commitments can be under pressure even with healthy EBITDA.

Example 2: Weak EBITDA, positive cash flow

Now imagine a retail business having a tough quarter:

• EBITDA for the quarter: $5,000

But the cash flow statement shows positive net cash flow because:

• It sold assets and brought in $30,000 from an investing inflow
• It stretched supplier payments, increasing accounts payable by $10,000

Overall, cash looks strong – but that’s not the same as sustainable trading performance. Selling assets can’t fund your operations forever, and delaying payments can cause future financial challenges.

When to use EBITDA and cash flow for your business

Use EBITDA when you want to understand pure operational profitability and whether you’re getting better operational efficiency over time.

Use cash flow when you want to understand whether you have enough cash to pay wages, suppliers, tax, etc. and whether growth is actually generating cash or just building accounts receivable.

The reality is that most smart operators track both. EBITDA helps you see whether the engine is working. Cash flow shows whether there’s petrol in the tank.