The Finance Gem 💎 #86 - The Issue with EBITDA

^{Welcome to Issue #86 of The Finance Gem}

^{Today’s Finance Gems:}

1. The Metric Everyone Loves - Until It Blows Up the Business

2. EBITDA Doesn’t Pay the Bills - Cash Flow Does

3. Why EBITDA is Overrated

1. The Metric Everyone Loves - Until It Blows Up the Business

It’s one of the most popular metrics in finance. It’s simple. It’s catchy. And it’s everywhere.

But here’s the problem: EBITDA is one of the most misunderstood and misused metrics in business.

It’s praised for its simplicity and abused for its weaknesses. And the results are costly mistakes:

• Overstated valuations

• Misguided decisions

• Deceived investors

Here are 10 ways EBITDA gets it wrong—and what to use instead.

1️⃣ Comparative Analysis
✕ EBITDA → ✔ Free Cash Flow (FCF)
FCF factors in capital expenditures and working capital, giving a true picture of operating performance.

2️⃣ Valuation
✕ EBITDA → ✔ Discounted Cash Flow (DCF)
DCF considers future cash flows, growth, and capital needs—EBITDA doesn’t.

3️⃣ M&A Decisions
✕ EBITDA → ✔ Discounted Cash Flow (DCF)
A realistic valuation needs synergies, integration costs, and future risks—not just earnings multiples.

4️⃣ Loan Approvals
✕ EBITDA → ✔ Cash Debt Service Coverage Ratio (CDSCR)
Lenders care about actual cash available for debt payments, not earnings before expenses.

5️⃣ Performance Measurement
✕ EBITDA → ✔ Return on Capital Employed (ROCE)
ROCE measures profitability and capital efficiency—EBITDA doesn’t consider capital structure.

6️⃣ Investor Communications
✕ EBITDA → ✔ Economic Value Added (EVA)
EVA reflects real economic profit by subtracting capital costs from NOPAT.

7️⃣ Budgeting & Forecasting
✕ EBITDA → ✔ Free Cash Flow after Principal Repayments
Projects net cash after all financial obligations—EBITDA ignores debt payments.

8️⃣ Restructuring Decisions
✕ EBITDA → ✔ Segmented Contribution Margin
Pinpoints direct profitability by business segment for smarter restructuring.

9️⃣ Sector-Specific Analysis
✕ EBITDA → ✔ Operating Margin
Measures operational profitability with real costs—EBITDA ignores expenses.

🔟 Incentive Compensation Planning
✕ EBITDA → ✔ Economic Value Added (EVA)
Aligns management incentives with long-term value creation, not short-term earnings games.

EBITDA isn’t useless. But relying on it alone? A mistake. Use better metrics—and make better decisions.

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2. EBITDA Doesn’t Pay the Bills - Cash Flow Does

EBITDA might look good on paper, but it won’t keep the lights on.

Cash flow will. And guess where cash flow comes from?

Operations.

There are three key drivers of cash flow every business leader needs to master:

• Revenue Growth

• Operating Profits

• Working Capital Efficiency

Let’s break it down:

1. Revenue Growth

Cash flow starts with revenue—but not just any revenue. Smart growth matters.

What fuels revenue growth?

• Sales Volume: Sell more units, but strategically.

• Pricing Strategy: Optimize pricing to maximize margins.

Revenue fuels your cash flow engine, but growth alone won’t cut it.

2. Operating Profits

Revenue is meaningless if it doesn’t translate into profit.

What strengthens operating profit?

• Lower COGS: Renegotiate with suppliers or automate processes.

• Reduced SG&A: Cut waste in marketing, payroll, and overhead.

Strong margins = strong cash flow.

3. Working Capital Efficiency

This is where businesses win or lose.

Why it matters: because efficient working capital ensures cash isn’t unnecessarily locked up.

What drives it?

• Inventory Turnover: Stock what sells best (lower DIO).

• Receivables: Collect payments faster (improve DSO).

• Payables: Optimize supplier payments (extend DPO).

Together these make up the Cash Conversion Cycle. Learn more in my Cash Flow Masterclass or save for a limited time with The Masterclass Bundle. 

Remember:

EBITDA might make your financials look impressive. But it won’t pay bills, fund growth, or reduce debt. So if you want a sustainable business, focus on what really matters: Cash flow from operations.

For a limited time, The Masterclass Bundle is back and it includes my popular EBITDA Training Webinar. Save 50% off my 2 highly appreciated Masterclasses, cheatsheets and checklists.

3. Why EBITDA is Overrated

EBITDA: The Most Misunderstood Metric in Business

EBITDA looks great on paper. But here’s the problem—it’s not cash flow. And that difference can sink a business.

✓ It Ignores Cash Flow

EBITDA strips out debt repayments, taxes, and capital expenditures. Sounds great—until you realize those are real cash outflows. Profit isn’t liquidity. Cash is.

✓ It Hides Operational Weaknesses

Depreciation and amortization exist for a reason. Ignoring them makes aging assets and high fixed costs disappear—on paper. In reality? They’re draining cash.

✓ It Inflates Valuations

Many investors use EBITDA multiples. Many companies game the system. Relying on it alone? A fast track to overpaying for an underperforming business.

What To Do Instead

✓ Track Free Cash Flow—it tells you how much cash the business actually generates.
✓ Look at Net Income in Context—profitability means nothing without liquidity.
✓ Use EBITDA + Cash-Based Metrics—because reality lives in the details.

EBITDA isn’t useless. But it’s not the truth. Know the difference, and you’ll make better decisions.

Learn more with The Masterclass Bundle - for a limited time save 50% off my two popular courses, save even more with my cheatsheets and checklists + get my EBITDA training webinar as a BONUS.

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As always, if you have specific suggestions or feedback, simply reply to this email.

Thanks so much for reading.

Oana

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