This may be a very stupid question, but I think it'd be better if someone else besides my professor can explain it to me.

Why is EBITDA the closest proxy to Free Cash Flow: and which type of FCF - levered or unlevered?

EBITDA = Rev - COGS = GP - Opex

Levered FCF = EBIT (1-Tax) + D&A +/- change in working capital - Capex
Unlevered = NI (1-Tax) + D&A +/- change in working capital - capex - debt repayment.

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Neither. It's a proxy for operating cash flow or the CFO section from the CFS. Could be wrong though. The idea is it should be close to CFO because net income is less than EBITDA and includes interest expense and D&A. The D&A is added back in CFO as well as negative changes in net working capital as well as losses from the income statement, so it should be relatively close. Of course there can be significant discrepancies though. EBITDA is relatively easy to calculate though and good approximation of operating cash flow.

CFO = NI + D&A (or non-cash expense) -/+ changes in wc. What do you mean that it adds back negatives changes in NWC as well as losses on IS

Your CFO equation is correct, but you're forgetting to subtract gains from IS and add losses from IS. For example, when a company sells an asset for more than book value, it recognizes a gain on sale. If it sells it for less than book value, it recognizes a loss on sale. These are both non-cash items on the IS, so you need to subtract gains in CFO and add losses. That's what I meant by add losses. For NWC, a negative change in NWC will increase CFO because current assets are going up less than current liabilities. Basically my point was that EBITDA should be close to CFO because CFO uses Net Income(which is a fraction of EBITDA) but then increases with negative change in NWC and losses from income statement. It also adds back D&A which EBITDA is already accounted for. So in general, EBITDA will be relatively close to CFO. It's not exact, and in some scenarios, it may not even be close. However, if you wanted a quick general measure of CFO, you could calculate EBITDA instead of having to do the long ass formula. Remember EBITDA is just a proxy for operating cash flow. It's basically an approximation, and it won't be completely exact.

**EBITDA - How to Find-->via Public filings / Calculate "quick & dirty" estimate
**
see my post on EBITDA below - lengthy but helpful. Portion pasted below w/ hyperlinks
https://www.wallstreetoasis.com/forums/alternatives-to-bloomberg-for-br…

**EBITDA - ways to pull publicly / quick & dirty estimate
**
1) EDGAR Search - https://www.sec.gov/edgar/searchedgar/companysearch.html
1A) 10-K / 10-Qs - estimate EBITDA-- Operating Income + D&A = EBIT + DA = EBITDA
2) 10-K / 10Qs - EBITDA disclosed
https://www.sec.gov/Archives/edgar/data/1530950/000153095017000231/0001…
3) Investor Presentation 4Q19 /- Sources & Uses and Pro Forma Cap Table
4) Lender Presentation - Public - Sources & Uses and Pro Forma Cap Table
https://www.sec.gov/Archives/edgar/data/1357615/000114036118013387/ex99…
5) Press Release - 4Q19 Results - non-GAAP financial results supplement
https://www.postholdings.com/2019/11/21/post-holdings-reports-results-f…
6) Credit Agreement - Definitions - EBITDA - sometimes disclosed
https://www.sec.gov/Archives/edgar/data/1528930/000117184320001015/exh_…
7) S&P / Moody's Ratings Reports
a) Sometimes disclosed - Incremental Facility terms. "\$210 or 100% EBITDA" = \$210

Combined Company Non-GAAP Pro Forma Adjusted EBITDA Reconciliation

Operating Income \$1,100
+D&A 959
+ Other non-cash, net 42
+ Business optimization costs 77
= Operating EBITDA \$2,178 (Op Income + D&A = 94% of \$2,178)

• Acquisitions and Disposals 15
• Unrealized cost savings 168
= Adjusted EBITDA \$2,361 (Op Income + D&A = 87% of \$2,361

-so I think Operating Income +D&A is a decent quick and dirty estimate, if you arent going to be penalized for 100% accuracy

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