When evaluating a company’s financial health, Free Cash Flow (FCF) and EBITDA are two critical metrics, each providing unique insights into performance.
Free Cash Flow (FCF)
FCF measures the cash available to investors after covering operating expenses and capital investments.
Advantages:
1. Provides a comprehensive evaluation of financial health.
2. Accounts for both shareholders and debt holders.
3. Unaffected by changes in capital structure, making it reliable for
ย assessing efficiency.
Disadvantages
1. Complex calculations.
2. Sensitive to reinvestment needs.
3. Accounting variations may impact results.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
๐๐๐๐ง๐๐ highlights a companyโs operating performance, excluding the impact of financing and accounting decisions.
๐๐ฑ๐๐ฎ๐ป๐๐ฎ๐ด๐ฒ๐:
1. Easy to calculate and compare across companies.
2. Useful for evaluating operational performance and growth potential.
3. Allows for cross-industry comparison despite differing accounting methods.
๐๐ถ๐๐ฎ๐ฑ๐๐ฎ๐ป๐๐ฎ๐ด๐ฒ๐:
1. Can overstate profitability by ignoring debt and taxes.
2. Doesnโt account for working capital changes.
3. Lacks standardization since itโs a non-GAAP metric.
