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EBITDA describes your business. It cannot tell you what your business can actually afford.
That single distinction is where a lot of confident, profitable companies get into trouble. The EBITDA line looks strong. The story to the board is clean. And underneath it, liquidity is tightening in ways the metric is designed not to show.
EBITDA is not a bad number. It's a useful one, for the things it was built for. The damage comes from using it for the things it was never built for: the decisions where real cash leaves your account.
This issue draws the line. What EBITDA is genuinely good for, the four costs it removes, and the five decisions you should never make off it.
Here's what we're covering today:
What EBITDA actually measures, and the three jobs it does well
The four real costs EBITDA strips out, with the math on each
The five CEO decisions that must run on cash, not EBITDA
The covenant-and-multiple trap that turns an EBITDA habit into a balance-sheet problem
~ 8 minute read
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What EBITDA Is Actually For
EBITDA is earnings before interest, taxes, depreciation, and amortization. Strip those four out and you get a rough proxy for the operating performance of the business, independent of how it's financed, how it's taxed, and how it accounts for past capital spending.
That makes it genuinely useful for three jobs.
It lets you compare two businesses, or two years, without financing and tax structure distorting the picture. It gives buyers and lenders a common benchmark to value against, which is why deals get quoted in EBITDA multiples. And it gives you a fast read on operating direction: is the core engine getting more or less profitable, before the capital structure has its say.
Those are real uses. Keep them. The problem is never that you looked at EBITDA. The problem is when you decide off it.
Because the four things EBITDA removes do not disappear. You still pay every one of them, in cash, on a schedule you don't control.
The Four Costs EBITDA Removes That You Still Have to Pay
Interest and debt service. EBITDA is measured before interest. But interest is a contractual cash payment, and principal repayment doesn't appear anywhere on the income statement. A business with $4M of EBITDA and $1.5M of annual interest and principal is not a $4M business in cash terms. It's a $2.5M business, before it has paid a dollar of tax or replaced a single asset.
Taxes. EBITDA is before tax. Tax is cash, due on a government calendar, not yours. Whatever your effective rate, that slice of the EBITDA line is already spoken for.
Working capital. This is the one EBITDA hides most completely. A company growing 30% can show rising EBITDA every quarter while its bank balance falls, because receivables and inventory absorb the cash faster than profit replaces it. EBITDA says the engine is stronger. The cash account says you're funding someone else's payment terms.
Capital expenditure. EBITDA adds back depreciation, which is the accounting echo of money you already spent or will spend again. Add it back and you've quietly assumed your equipment, systems, and facilities maintain themselves for free. They don't. Maintenance capex is the cash cost of staying in business at your current capacity, and it comes straight out of the same EBITDA you were admiring.
Run the four together and the gap is rarely small. For example, take $4M of EBITDA. Subtract $1.5M of debt service, $500K of tax, $600K of working capital build in a growth year, and $400K of maintenance capex. You're left with $1M of cash the business actually generated and could deploy. The EBITDA line said $4M. The decision number was $1M.
That's not a rounding error. That's the difference between a confident "yes" and a covenant breach two quarters later.
The Five Decisions That Must Run on Cash, Not EBITDA
Here's the operator rule. The moment a decision moves real cash, EBITDA stops being the right input. Five decisions live in that category.
1. How much debt you can carry. Lenders quote leverage in EBITDA multiples because it's convenient for them, not because it's safe for you. Your real capacity is set by free cash flow after tax, working capital, and maintenance capex, measured against debt service with margin. A "3x EBITDA" facility can be comfortable or suffocating depending entirely on the cash the EBITDA actually converts to.
2. What you can distribute. Dividends and owner distributions come out of cash, not EBITDA. Paying out against a strong EBITDA line while working capital is absorbing the real cash is how profitable companies end up borrowing to fund their own distributions.
3. When to time capital spending. A capex decision approved because "EBITDA covers it" ignores that the cash leaves now and the return arrives later. The question is whether free cash flow, after everything else committed, funds the spend on the actual timeline, under a downside case as well as a base case.
4. How close you are to a covenant. Most covenants are defined on EBITDA, which is exactly why you can't manage them on EBITDA alone. You have to know how your cash position moves the inputs, because a single slow quarter on collections can breach a ratio that looked fine on the operating line.
5. What an acquisition is actually worth. Paying a multiple of the target's EBITDA without modeling its working capital cycle, its real maintenance capex, and its debt service is how acquirers overpay. The EBITDA multiple is the headline. The cash the business throws off after its own obligations is the price you're really paying.
In all five decisions, EBITDA describes the opportunity. Cash decides whether you can take it.
The Trap: EBITDA-Defined Covenants and EBITDA Multiples
The reason this matters more than a definitions lesson is that the entire outside world prices you on EBITDA.
Your lender sets the covenant on it. A buyer quotes a multiple of it. A bank sizes your facility against it. So the gravitational pull is to start managing the business toward the EBITDA number, because that's the number everyone else is watching.
That's the trap. When EBITDA is the number you optimize, you can hit every target on the operating line while the cash conversion quietly deteriorates underneath it.
The covenant is defined on EBITDA, but it breaks on cash. The multiple is quoted on EBITDA, but the deal succeeds or fails on the cash the business generates after it pays for itself.
The discipline is not to ignore EBITDA. It's to never let it travel alone.
The Fix: Never Read One Without the Other
Every time someone hands you an EBITDA number, pair it with its cash counterpart before you act on it.
EBITDA grew 12%? Ask what operating cash flow did over the same period. If they moved together, the growth is real. If EBITDA rose while cash fell, working capital or capex is eating the gain, and you need to know which before you commit a dollar against it.
Considering more debt at "3x EBITDA"? Convert it to coverage on free cash flow after tax, working capital, and maintenance capex, with a buffer for one bad quarter.
Looking at a target at "6x EBITDA"? Build the same business's free cash flow after its working capital cycle and its real maintenance capex, and see what multiple you're actually paying on cash.
This is a small habit with a large payoff. Two numbers, side by side, every time. EBITDA for the description. Cash for the decision. Doing it by hand, every month, is exactly the work Financiario takes off your desk: connected financial intelligence on top of your accounting system of record, turning your actuals into decision-ready answers automatically. No new software to run, no analyst to hire, no waiting on the month-end deck.
Use EBITDA to describe your business to the people who benchmark it. Use cash to decide what your business can actually do.
The companies that compound value keep those two jobs straight. The ones that get surprised let the describing number make the deciding calls.
On LinkedIn Learning: Earn 3 CPE Credits
I built a course on this for LinkedIn Learning: Strategic Financial Intelligence for Business Leaders. It's on the NASBA-approved list for 3 CPE credits, so you can watch at your own pace and claim the credit while you build the skill.
See you next week.
Oana
P.S. Don't miss the next free CEO masterclass, How to Lead With Financial Intelligence, live on July 9. We'll connect EBITDA, cash, and enterprise value on a real company so you can see exactly where yours is leaking. Reserve your seat →
Oana Labes, MBA · CPA
Founder & CEO - The CEO Financial Intelligence Academy & Financiario
$500M+ financing · 400+ companies · Top 10 LinkedIn USA · Forbes · LinkedIn Learning
