EBITDA and CFO

CFA Level II Equities
#1

Hi Everybody,

I hope the prep is going well, May is approaching and the pressure rises a bit :D.

I found the following statement in a study case:

EBITDA overestimates cash flow from operations if working capital is growing.

the statement turns out to be correct but I couldnt understand the relationship between EBITDA and CFO.

HELP smiley

#2

I got this from S2000, he said because when WC increases, there’s negative CFO associated with growth, EBITDA doesn’t capture that negative CFO.

#3

OK, so does it mean that this is the flaw of this valuation method which is the EV/EBITDA , when there is a massive investment in working capital (or fixed capital) that causes the CFO to become negative, the EBITDA doesn’t capture it !!

Thank you.

#4

What? Fixed capital investment is not CFO, it is CFI.