Whenever there is no positive correlation between EBITDA and FCF, always trust FCF.

Comparing any two entities, may it be two different sportsmen like Michael Jordan and Lionel Messi or two different companies like Apple and GE, is always very difficult because there is no common structure to compare them. It is comparatively a bit easier to compare sportsmen or companies within the same category as comparing Ronaldo and Messi or comparing Apple and Samsung, but even these comparisons are no walk in the park either.

In order to compare two entities, we always want to measure them on performance metrics by keeping all the other variables constant. Like, we want to compare players who played within the same generation and against similar opponents for a similar period of time. This ensures that we are exactly comparing the metrics that determine performance alone. Just like comparing players is complicated because of their different techniques, styles, pressures, backgrounds, etc. similarly comparing companies is difficult because of their different markets, taxation environments, capital structures (how they are funded), categories of operations, and other reasons.

In order to evaluate any company, we are especially interested in two values: how much money can this business earn and save (profit/bottom-line) and how many such customers can this company get (market size/share/revenue/topline). To compare companies, we start from market share, sales, and revenue as key top-line metrics. (Sales is the proceeds received by selling goods or services in a particular period, and revenue (invoiced revenue) is the income generated in that particular period. For many companies, sales and revenue might be the same. But for some companies, for example, renting cars will have revenue coming out of a sale in the subsequent months without a sale associated with the revenue, monthly rental income). Usually, in the initial stages, companies are more focused on growth and market share, and once the companies achieve a certain sustainable market share and growth, the focus starts shifting more into the operational profitability metrics.

A key bottom-line metric to measure and compare companies is Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). EBITDA is one such measure used to compare companies on how much a company has to spend in order to get that $1 revenue. It measures companies purely on their revenue, cost of goods sold (COGS), marketing costs, operations costs, human resources costs, and tech costs that are borne. In essence, these are all the functions that supported in one way or the other to get that revenue for the company.  This enables one to compare different kinds of companies basis purely on how much the company is spending on various support functions to get that revenue, and what is remaining after the major expenses incurred to get that revenue. EBITDA is pretty close to Operating Profit (OP) (OP has additional deductions of depreciation and amortization) and is a very healthy indicator of whether the business is earning enough to cover all its costs or not, and how much money can be saved post covering all operating costs.

However, different companies have different capital requirements for various revenue flows depending on the business category. EBITDA doesn’t take into account large capital expenditures required in order to buy assets, machinery, etc. simply because it is a capital expenditure that will be amortized over a long period of life. However, one needs the money to fund them right now. How this requirement of Capital Expenditure is funded (debt or equity and what type of debt and equity) can have a lot of implications from EBITDA to Cash Flow. Therefore, EBITDA is not the complete picture, especially in an asset-heavy business.


In general, there is always a fear about asset-heavy businesses, especially in India as we like to be traders than manufacturers. Because manufacturing needs heavy investments, R&D, and the product-market fit. Manufacturing will be an asset-heavy business but the margins will also be higher. Similarly, asset-light businesses will have low capital risk but the margins will also be lower. So, it is more about how it is managed than be fearful of capital expenditure of assets.

However, as you see, while companies can be EBITDA profitable and operationally profitable, cash expenses at the bottom can put a significant dent into the cash of the company. Most companies fail because of a lack of cash. This is why if there is no positive correlation between EBITDA and FCF then always trust the FCF.

Hope this is useful, thank you.