Thread by @IAmOanaLabes

EBITDA is flawed and unfit for most of the roles it has today.

So if you evaluating a company’s financial performance...

Don’t just use EBITDA.

🎯 EBITDA frequently gets adjusted to suit users individual needs and help mitigate their risks.

🎯 EBITDA needs replacing with a better profitability/cash flow measure that:

☑️ includes working capital investment

☑️ includes long term capital investment

☑️ includes payment obligations on debt

☑️ includes tax payment obligations

Here are 5 alternatives to EBITDA you can consider, depending on your business objectives:

**1. Adjusted EBITDA**

= Net Income + Interest + Taxes + Depreciation + Amortization + Adjustments

⚫Possible Adjustments List:

>> non-recurring expenses (management/M&A)

>> normalized depreciation/amortization (management, M&A)

>> rental expenses (banks)

>> proforma “what-if” expenses or cost savings (M&A)

>> CAPEX

>> cash taxes

>> distributions (banks)

>> working capital investments

>> fixed capital investments

✅**Pros**: easily calculated

❌**Cons:** most adjustments won't include debt payments, CAPEX or working capital investments

**2**. 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄(𝗢𝗖𝗙)

= Net Income + Depreciation/Amortization + Other Non Cash Items +/ Changes in Working Capital

✅**Pros**: includes tax payment obligations and working capital investment

❌**Cons**: doesn’t include long term capital investment or payments on debt obligations

**3**. 𝗙𝗿𝗲𝗲 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 𝘁𝗼 𝘁𝗵𝗲 𝗙𝗶𝗿𝗺 (𝗙𝗖𝗙𝗙 𝗼𝗿 𝗨𝗻𝗹𝗲𝘃𝗲𝗿𝗲𝗱 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄)

= Operating Cash Flow + Interest x (1- Tax Rate) +/- Changes in Fixed Assets

✅**Pros**: includes tax payment obligations, working capital investment, and long term capital investment

❌**Cons**: doesn’t include debt principal payment obligations

4. 𝗙𝗿𝗲𝗲 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 𝘁𝗼 𝗘𝗾𝘂𝗶𝘁𝘆 𝗛𝗼𝗹𝗱𝗲𝗿𝘀 (𝗙𝗖𝗙𝗘 𝗼𝗿 𝗟𝗲𝘃𝗲𝗿𝗲𝗱 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄)

= Operating Cash Flow +/- Changes in Fixed Assets +/- Changes in Net Debt

✅**Pros**: includes working capital investment, tax payment obligations, long term capital investment, and payment of debt obligations

❌**Cons**: could be complex to calculate and information may not be readily available

**5. Economic Value Added**

= EBIT - Taxes - WACC x (Fixed Assets + Net Working Capital)

✅**Pros**: includes tax payment obligations as well as a cost of capital charge for working capital investment, long term capital investment, and outstanding debt.

❌**Cons**: could be complex to calculate.

What do you think?

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