EBITDA Is Not Cash Flow

What manufacturing boards should measure before approving capacity

A manufacturing company can report higher margins while borrowing more to fund day-to-day operations.

In an illustrative cash bridge for a manufacturer with revenue of ₹120 crore, EBITDA of ₹24 crore less a ₹13 crore net increase in operating working capital leaves ₹11 crore before interest, taxes and other cash-flow items.

For a board, the practical questions are:

1. How much operating cash the business converts from EBITDA.
2. What is absorbing cash.
3. Whether the next investment in capacity will earn an adequate return on all the capital it requires.

The monthly metric: cash conversion after working capital

A useful board-level headline is the cash conversion ratio:

Cash conversion ratio = Cash generated from operations after working-capital movements, before interest and tax ÷ EBITDA

The company should define the numerator consistently and reconcile it to the statutory cash-flow statement. Showing it before interest and tax keeps it aligned with EBITDA; cash interest and income tax should then be shown as separate lines in the board’s cash bridge. Review the current month, year-to-date and rolling 12-month ratio. The rolling view helps explain seasonality without hiding a recent deterioration.

The ratio is a management measure, not a substitute for the statutory cash-flow statement. IAS 7 classifies cash flows as operating, investing or financing and describes operating cash flows as an indicator of whether operations generate cash to meet obligations and fund investment. 1

The drivers behind the ratio

The headline ratio needs a driver view alongside it:

Track inventory days, receivable days and payable days together, as well as the cash-conversion cycle.

Cash-conversion cycle = Inventory days + Receivable days − Payable days

A deliberate inventory build ahead of a seasonal peak is different from stock that is aging without demand. Contractual supplier credit is different from overdue invoices.

The board should ask management to explain the reason, expected duration and cash impact of each material movement.

How reported profit can become a cash shortage

Consider a manufacturer reporting revenue of ₹120 crore and EBITDA of ₹24 crore. Its EBITDA margin is 20%. Now assume receivables rise by ₹9 crore, inventory rises by ₹7 crore and payables rise by ₹3 crore. The net increase in operating working capital absorbs ₹13 crore.

Financial illustration: manufacturing cash bridge

In this simplified illustration, EBITDA of ₹24 crore leaves ₹11 crore before interest, taxes and other cash-flow items once the working-capital increase is accounted for. The company has not made an accounting loss, yet more cash is required to support the same operating cycle. The illustration excludes other working-capital movements, non-cash adjustments, investing items and financing items. It is not a statutory cash-flow statement.

Where manufacturing commits cash

Manufacturing commits cash in stages:

1. Materials are purchased.
2. Production creates work-in-progress.
3. Goods wait for dispatch or customer acceptance.
4. Invoices await collection.

Delays anywhere in this cycle can increase the capital needed to support revenue. EBITDA does not show those timing effects, nor does it show the cash spent on plant and equipment. 2

Capacity expansion: approve the return, not the EBITDA headline

EBITDA growth is relevant to an expansion case, but it is not an approval test on its own. A project can add EBITDA and still destroy value if it requires too much capital, ramps up slowly, consumes more working capital than planned or earns less than the company’s cost of capital.

The board should evaluate the project’s incremental return on invested capital against a clearly stated hurdle rate based on the company’s cost of capital and project risk. Use project cash flows, net present value and internal rate of return as companion measures, especially for a material long-lived investment. The analysis should use after-tax cash flows and account for the effect of the project on existing operations. 3

Include the full capital required

The investment case should include the full capital required to make the new capacity productive:

1. Land, buildings, machinery, utilities, environmental and safety requirements, installation, commissioning and contingency.
2. Ramp-up costs, yield and scrap assumptions, labour, energy, maintenance and sustaining capital expenditure.
3. Incremental raw-material and finished-goods inventory, customer credit and other working capital.
4. Demand, pricing, utilization and customer commitments under base and downside cases.
5. Execution delays, cost overruns, financing needs, cannibalisation and any impact on current products or facilities.

Review the approved case after investment

The board should also set post-approval milestones. Compare actual project spending, commissioning, utilization, working capital, cash generation and return against the approved case.

If assumptions move outside agreed limits, management should return with options before committing further capital.

What current disclosures illustrate

Tata Steel reported consolidated EBITDA of ₹34,848 crore for FY2025–26, operating cash flows before capex of ₹35,064 crore, free cash flow of ₹10,738 crore, and approximately ₹5,442 crore of cash released through working-capital initiatives. It separately reported capital expenditure of ₹14,559 crore. The disclosures show that earnings, working-capital management and investment spending are distinct elements of financial performance. 4

For the quarter ended June 2026, Tata Steel said inventory build-up linked to operational and supply-chain disruptions and higher prices affected working capital. The company also announced approval of an estimated ₹33,873 crore project to expand steelmaking capacity at Neelachal Ispat Nigam Limited by 4.8 million tonnes per annum. The example puts working capital and capacity investment in the same board conversation; it does not, by itself, establish the project’s eventual return. 5

Three questions for the monthly board pack

1. How much cash did operations generate after working-capital movements, before interest and tax, compared with EBITDA? What explains the gap?
2. Which inventory, receivables or payables movements are temporary, and which point to a structural change or control issue?
3. For each material capacity project, what incremental return and cash flow are expected against the full capital and working capital required?

EBITDA describes operating earnings before specified charges.

Cash conversion shows whether those earnings are turning into cash after the operating cycle is funded.

Incremental Return on Invested Capital (ROIC) and project cash flows help determine whether expansion is likely to create value.

A manufacturing board needs all three perspectives to judge growth and resilience.

Sources

1. IFRS Foundation, IAS 7 Statement of Cash Flows.
2. U.S. Securities and Exchange Commission filing describing limitations of EBITDA, including working capital and capital expenditure.
3. CFA Institute, Capital Investments and Capital Allocation.
4. Tata Steel Integrated Report & Annual Accounts 2025–26, Financial Capital.
5. Tata Steel, results for the quarter ended June 30, 2026.

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The board question is not only “How much EBITDA will this add?” It is also “How much cash and capital will it require, and what return will that investment earn?”

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