The analogy of EBITDA as “dating material” and Free Cash Flow (FCF) as “marriage material” is a fitting way to contrast the two metrics, especially in the context of evaluating a company’s financial health.
EBITDA: Dating Material
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is often considered a short-term or surface-level metric:
- Attractive but superficial: Like dating, EBITDA focuses on the “best parts” of a company by stripping away non-operational expenses, offering a clear but limited view of profitability. It shows what the company could achieve under optimal conditions.
- Used for initial attraction: Private equity firms and investors often use EBITDA as a quick evaluation tool to compare companies without diving into deeper financial complexities. It’s a “first impression” metric that simplifies decision-making but ignores cash flow, debt obligations, and capital expenditures.
Free Cash Flow (FCF): Marriage Material
On the other hand, FCF represents long-term sustainability:
- Substance over surface: Like marriage, positive Free Cash Flow signals that a company is genuinely generating enough cash to fund operations, cover debts, and invest in growth. It reflects a business’s true capacity to sustain itself over the long run.
- Shows commitment: FCF provides a more comprehensive and reliable metric because it accounts for all essential expenses, including capital investments and debt repayments. This metric paints a full picture of how well a company is managing its resources and cash flows—crucial for long-term relationships with investors.
Summary:
While EBITDA may catch the eye (like dating), positive FCF is the real deal, revealing the company’s ability to maintain its financial commitments and grow sustainably over time. Investors and private equity firms may be attracted to EBITDA, but long-term success and viability hinge on the ability to generate positive Free Cash Flow, which truly indicates a company’s financial health and longevity.