How does EBITDA relate to free cash flow during a DCF analysis?

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, serves as a fundamental measure of a company's operating performance. In the context of a Discounted Cash Flow (DCF) analysis, EBITDA is typically used as the starting point for estimating free cash flow.

Free cash flow is derived from EBITDA by adjusting for various factors including changes in working capital, capital expenditures, taxes, and interest expenses. Following this methodology helps analysts gauge the cash-generating potential of a business before financing costs and non-cash adjustments are taken into account. Since EBITDA reflects the company’s operating efficiency without the effects of financing and accounting decisions, it provides a clearer view of how much cash is available from operations, enabling further adjustments to arrive at free cash flow.

This understanding is crucial because free cash flow is utilized in DCF models to evaluate the present value of expected future cash flows, which directly ties back to the intrinsic value of a business.