While EBITDA may be a widely accepted indicator of performance, using it as a single measure of earnings or cash flow can be very misleading. A company can make its financial picture more attractive by touting its EBITDA performance, shifting investors' attention away from high debt levels and unsightly expenses against earnings.
Unlike proper measures of cash flow, EBITDA ignores changes in working capital, the cash needed to cover day-to-day operations. This is most problematic in cases of fast-growing companies, which require increased investment in receivables and inventory to convert their growth into sales. Those working capital investments consume cash, but they are neglected by EBITDA.
Even if a company just breaks even on an EBITDA basis, it will not generate enough cash to replace the basic capital assets used in the business. Treating EBITDA as a substitute for cash flow can be dangerous because it gives investors incomplete information about cash expenses.