The red flag of the EBITDA report for investors is significant. It helps the investors to identify that a company reports EBITDA well but hasn’t done so in the past. It could happen when companies have borrowed heavily. Moreover, it experienced rising capital and development costs. EBITDA might be misleading in the vase that it distracts investors.
What the Investors should Note!
The misconception of EBITDA lies in the representation of cash earnings. Unlike free cash flow, EBITDA ignores the cost of assets. The most criticism of EBITDA occurs in the profitability as a function of sales and operations alone. It is almost as if the assets and financing the company needs to survive were a gift, said Investopedia.
EBITDA does not cover the cash required to fund working capital and the replacement of decayed or old equipment. The example is a company may be able to sell a product for a profit. However, it does not know the use to acquire the inventory to gill the sales channels. In a software company for instance, EBITDA does not include the expense of developing the current software for the latest products.
