If a company shows positive EBITDA for many years but goes bankrupt due to cash issues, which factor not reflected in EBITDA is most likely to cause cash-flow problems leading to bankruptcy?

If a company shows positive EBITDA for many years but goes bankrupt due to cash issues, which factor not reflected in EBITDA is most likely to cause cash-flow problems leading to bankruptcy?

• A. Interest expense
• B. CapEx
• C. One-time charges
• D. Depreciation

Answer: (B)

EBITDA measures operating profitability before the cash needs tied to fixed assets. The factor not captured by EBITDA that is most likely to cause cash-flow problems is capital expenditures—the cash a company must spend to maintain or expand its asset base. Because EBITDA excludes CapEx, a business can show positive earnings while continually draining cash to fund investments. If these cash outflows outweigh the cash generated from operations, the company can run into liquidity trouble and potentially bankruptcy, even though EBITDA looks strong. Depreciation is a non-cash charge, so it doesn’t directly consume cash; interest expense and taxes are cash outflows but are financing effects that EBITDA intentionally omits. One-time charges may hurt cash in a given period but aren’t the persistent drain CapEx represents.

EBITDA measures operating profitability before the cash needs tied to fixed assets. The factor not captured by EBITDA that is most likely to cause cash-flow problems is capital expenditures—the cash a company must spend to maintain or expand its asset base. Because EBITDA excludes CapEx, a business can show positive earnings while continually draining cash to fund investments. If these cash outflows outweigh the cash generated from operations, the company can run into liquidity trouble and potentially bankruptcy, even though EBITDA looks strong. Depreciation is a non-cash charge, so it doesn’t directly consume cash; interest expense and taxes are cash outflows but are financing effects that EBITDA intentionally omits. One-time charges may hurt cash in a given period but aren’t the persistent drain CapEx represents.