Labs

The earnings and cash bridge

Same business, two very different numbers.

Live experiment

The earnings and cash bridge

EBITDA vs free cash flow180 vs 57.5

Revenue$500

1001000

Cost of sales, excluding D&A$200

0600

Other operating costs, excluding D&A$120

0400

Depreciation and amortization$40

0150

Nonoperating income$0

0100

Interest expense$10

0100

Assumed income tax rate25 %

040

Capital expenditure$60

0250

Increase in operating working capital$20

-100150

Before you move a sliderCan EBITDA go up while free cash flow goes down?

EBITDA 180 − interest 10 − tax 32.5 − ΔNWC 20 − capex 60 = FCF 57.5

Revenue

500

Gross profit

300

Operating income

140

EBIT

140

EBITDA

180

Net income

97.5

Operating cash flow

117.5

Free cash flow

57.5

Read the mechanism

Buying equipment takes cash now; depreciation takes profit a little at a time over the years. EBITDA leaves out capex, working capital, interest and tax, so it is not cash available to owners.

Model assumptions and units

All amounts are made-up $000. D&A is shown separately and counted once. Nonoperating income is treated as ordinary cash income inside operating cash flow, not an asset-sale gain. Losses earn no tax benefit here. Free cash flow means operating cash flow minus capex.

The earnings and cash bridge

The earnings and cash bridge

Learn the thinking behind it