In financial accounting, cash flow from operating activities refers to the money generated from normal, repeatable business functions. This includes earnings before interest and taxes and depreciation before taxes. EBIT was the predecessor to earnings before interest, taxes, depreciation and amortization; many companies prefer to emphasize EBITDA because it omits costs that tend to drag down other cash flow measurements.
EBIT and EBITDA
EBIT is traditionally equated with operating profit, although the U.S. Securities and Exchange Commission emphasizes that this may or may not be true. The point of emphasizing earnings before any interest payments or tax obligations is that it allows companies with different capital structures or tax rates to be compared. EBIT is supposed to focus on profitability resulting from management.
To weed out the impact of capital equipment and long-term assets more effectively, financial analysts use EBITDA. Excluding depreciation and amortization serves to isolate structurally neutral profitability.
Cash Flow From Operating Activities
Unlike EBIT and EBITDA, which are not official metrics under generally accepted accounting principles, cash flow from operating activities is reported on the company’s cash flow statement. Cash flow from operating activities is often contrasted with EBITDA to highlight short-term capital use and financing. The baseline money input, EBIT, is present in both metrics.
While EBITDA can prevent different useful life estimations from affecting cross-company comparisons, it fails to account for alternative approaches in capital expenditures. This is particularly important when considering capital-intensive companies that might have high capital expenditures but higher future return on investment capital.
Cash flow from operations forces an analyst to consider different treatments of capital and depreciation costs, which have real implications for future earnings. In other words, EBITDA cannot recognize changes in working capital and liquid cash required to run day-to-day operations.