Hi {{first name|there}},

EBITDA has a big brother.

His name is Free Cash Flow — and unlike EBITDA, he forces you to deal with reality.

But here's the problem: "free cash flow" gets used as if it's one universal metric. It isn't. There are three distinct versions, they measure different things, and mixing them up leads to bad analysis and worse decisions.

Here's what we're covering in this issue:

I’m hosting a sponsored session with Ramp on how finance leaders can use EBITDA more effectively and avoid the mistakes that happen when it gets treated as a complete measure of performance.

In this session, we’ll break down what EBITDA is actually useful for, where it can mislead decision-making, and what leaders need to look at alongside it to get a better read on performance, cash flow pressure, and the real financial position of the business.

This session is for FP&A leaders, operators, and CFOs who want to use EBITDA more intelligently and communicate it more effectively.

If you want a sharper way to interpret EBITDA and use it more strategically, join us here.

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Now let’s talk about cash.

This is not a technical accounting distinction. It is a capital strategy distinction — and getting it wrong costs you leverage, visibility, and in some cases, your credibility with the people who fund your growth.

EBITDA and free cash flow are both useful. But they answer different questions. When CEOs and boards conflate them, capital gets misallocated, risk gets underestimated, and financing conversations happen on the wrong terms.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It approximates a company’s operational profitability before capital structure decisions, tax strategy, and accounting for asset consumption.

It is useful for comparing operating performance across companies with different capital structures, estimating whether the core business generates enough to service debt, and building a starting point for valuation conversations. It is a profitability proxy. It is not a cash metric.

What EBITDA cannot tell you: whether the company actually generates cash. Whether growth is self-funding or debt-dependent. Whether working capital is consuming the profits EBITDA suggests exist. Whether the next investment can be funded internally.

Free cash flow is the cash a business generates after paying for the capital required to sustain and grow operations. The most common definition: operating cash flow minus capital expenditure.

A more decision-relevant version for CEOs: EBITDA minus taxes minus interest minus changes in working capital minus capex. This number tells you what actually came into the business as usable cash — after the company funded itself.

This is the number that pays down debt, funds acquisitions, self-funds growth without raising capital, determines how long the company can operate without external support, and tells lenders whether the business can service what it’s borrowing.

When free cash flow is positive and growing, the business is strengthening. When it’s negative while EBITDA looks strong, the business is funding growth by burning cash — often without the leadership team seeing it clearly.

The distance between EBITDA and free cash flow is not random. It has predictable components — and each one represents a capital decision with strategic consequences.

Working capital drag. As revenue grows, receivables and inventory often grow faster. Cash gets trapped in the operating cycle before it returns to the bank. A company with $10M EBITDA and $4M in rising receivables is not generating $10M of free cash. The working capital buildup consumes it before it reaches the bank account.

Capital expenditure. EBITDA adds back depreciation. But depreciation represents asset consumption — and at some point, those assets need to be replaced or upgraded. If capex runs at or above depreciation, the company is spending to stand still. If capex significantly exceeds depreciation, EBITDA can look strong while cash is being consumed by reinvestment.

Interest. Companies with meaningful debt can show healthy EBITDA while free cash flow is constrained by debt service. The higher the leverage, the more EBITDA overstates what the business actually keeps after obligations are met.

Taxes. EBITDA adds back taxes. Actual cash taxes can vary substantially from the statutory rate. Deferred tax liabilities, tax timing, and jurisdictional complexity all mean EBITDA tells you nothing reliable about cash tax burden.

Use EBITDA when you are comparing operating performance across companies or periods, building a preliminary valuation framework, or estimating rough debt service capacity. It is a useful starting point — not a finishing point.

Use free cash flow when you are evaluating whether growth is creating or consuming cash, assessing whether the company can fund investments internally, reviewing financing requirements, setting distribution policy, or deciding whether a strategic initiative is worth pursuing. FCF is the governing constraint when capital decisions are being made.

The CEO-level question is not “what does EBITDA show?” It is: after everything the business actually requires to operate and grow, what cash remains — and is that number increasing or decreasing as we scale?

Adjusted EBITDA allows management teams to present operating performance after removing items they believe are non-recurring or non-cash. Used carefully, it provides a cleaner view of underlying performance. Used aggressively, it hides structural deterioration behind footnotes.

Adding back SBC is common, and the logic is that it is non-cash. The problem is that it represents a real dilution cost to equity holders. Ignoring it makes the company look more profitable than it is on a fully-loaded basis. Any valuation or financing analysis that ignores SBC is working from an inflated baseline.

A one-time restructuring makes sense to exclude — once. When restructuring appears in adjusted EBITDA repeatedly, it is no longer non-recurring. It is part of the operating model being obscured. If a company restructures every two years, that cost belongs in the real operating picture.

Excluded as one-time items, often reasonably. But serial acquirers who exclude M&A costs every year are presenting a structurally inflated number. Acquisition activity is part of their strategy, which means those costs are part of the real operating cost structure.

Commonly added back post-acquisition. These can legitimately distort the picture during a specific transition window. But if integration costs run for multiple years, the definition of “transition” is doing a lot of work — and the adjustment is masking ongoing complexity.

Projecting the full-year impact of a partial-year acquisition is standard. Projecting synergies that haven’t been realized yet is optimism being presented as performance. Unearned synergies are not EBITDA. They are a plan.

The question to ask is always: what does EBITDA look like before adjustments, and how does that compare to what the business actually generates as free cash flow? When the gap is wide and growing, that’s the signal worth tracking.

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See you next week.

Warm regards,

Oana