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Abstract
While the cash flow concept of earnings before interest, taxes, depreciation, and amortization (EBITDA) is popular among commercial lenders and credit analysts, it has many shortcomings, and bankers should be aware of its limitations. One problem is that EBITDA ignores a company's tax expense, which is a cash-absorbing expense. Several case studies illustrate the problems involved in using the EBITDA cash flow concept. Cash flow analysis and assessment of debt service capacity require a more holistic approach that recognizes the impact of management, marketing, long-term planning, capital structure, and financial posture on cash flow. This approach can ensure that all cash-impacting activities are identified, properly understood, and planned for.