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Reconcile EBITDA to free cash flow through cash interest, taxes, working capital and capital spending. Follow a two-quarter example, worksheet formulas and a check against operating cash flow.
An EBITDA to FCF bridge explains how earnings become cash after operating payments and capital spending. Start with EBITDA, reconcile to operating cash flow, then subtract cash capital expenditures. Label the result: this article uses free cash flow as operating cash flow minus capex, after cash interest but before debt principal payments.
EBITDA excludes interest, income taxes, depreciation and amortization. It still contains accrual accounting effects: a sale can contribute to earnings before the customer pays, and inventory can consume cash before it becomes an expense.
The SEC's non-GAAP guidance, Question 102.07, describes operating cash flow less capital expenditures as a typical FCF calculation, while warning that the measure has no uniform definition. Write your calculation beside the result. The free cash flow glossary gives the underlying definition; this bridge explains the adjustments between earnings and that cash measure.
Operating cash flow = EBITDA + Other noncash operating charges − Cash interest − Cash income taxes − Increase in operating working capital + Other operating reconciliation adjustments
Free cash flow = Operating cash flow − Cash capital expenditures
An increase in operating working capital uses cash. A decrease releases it. Exclude cash, borrowings and balances already handled in the interest or tax rows from this working-capital subtotal.
These are reconciliation headings, not a substitute for reading the statement. The SEC's financial statement guide explains that the operating section adjusts net income for noncash items and operating assets and liabilities. Your EBITDA bridge must reach that same operating cash total.
Use the P&L, cash flow statement, opening and closing operating balance sheets, interest and tax payment schedules, and the cash capital-spending register. Keep the same company, consolidation scope and period across every file.
The P&L establishes EBITDA and any management adjustments. The balance-sheet schedules explain receivables, inventory, payables and accrual movements. The payment schedules identify cash interest and taxes rather than the corresponding expenses. The capex register separates cash paid from assets acquired on credit.
Assign one finance owner to each adjustment and retain the account or document reference. If a tax payable is covered in the cash-tax reconciliation, exclude it from the working-capital row. Otherwise the same payment timing difference enters twice.
Consider a US distributor comparing the quarters ended June 30 and September 30, 2026. All amounts below are exact USD; no rounding is required. Other noncash charges are stock-based compensation expense, which remains deducted in this company's EBITDA. There are no additional operating adjustments in this example.
Enter the following rows in a worksheet, with the labels in column A and the two periods in columns B and C.
| Worksheet row | Item | Q2 (USD) | Q3 (USD) |
|---|---|---|---|
| 2 | EBITDA | 1,200,000 | 1,320,000 |
| 3 | Other noncash operating charges | 40,000 | 50,000 |
| 4 | Cash interest paid | 60,000 | 75,000 |
| 5 | Cash income taxes paid | 180,000 | 195,000 |
| 6 | Increase in operating working capital | 140,000 | 240,000 |
| 7 | Cash capital expenditures | 300,000 | 420,000 |
| 8 | Operating cash flow | 860,000 | 860,000 |
| 9 | Free cash flow | 560,000 | 440,000 |
In B8, calculate operating cash flow:
=B2+B3-SUM(B4:B6)
In B9, calculate FCF:
=B8-B7
Copy both formulas across to column C. Q2 is $1,200,000 + $40,000 − $60,000 − $180,000 − $140,000 = $860,000 of operating cash flow. Subtract $300,000 of capex to reach $560,000 of FCF. Q3 operating cash flow is unchanged, but capex leaves only $440,000.
The working-capital line also needs its own support:
| Operating balance movement | Q2 (USD) | Q3 (USD) |
|---|---|---|
| Increase in trade receivables | 90,000 | 150,000 |
| Increase in inventory | 80,000 | 110,000 |
| Less: increase in trade payables | 30,000 | 20,000 |
| Cash absorbed by working capital | 140,000 | 240,000 |
The first subtotal is $90,000 + $80,000 − $30,000. The second is $150,000 + $110,000 − $20,000. These schedules assume no acquisitions, currency movements or noncash balance changes; reconcile those separately when present.
An EBITDA bridge that looks plausible can still omit an account. Rebuild operating cash flow from net income as a separate check.
| Independent P&L and cash-flow check | Q2 (USD) | Q3 (USD) |
|---|---|---|
| EBITDA | 1,200,000 | 1,320,000 |
| Less: depreciation and amortization | 200,000 | 220,000 |
| Less: interest expense | 60,000 | 75,000 |
| Less: income tax expense | 180,000 | 195,000 |
| Net income | 760,000 | 830,000 |
| Add back depreciation and amortization | 200,000 | 220,000 |
| Add other noncash operating charges | 40,000 | 50,000 |
| Less: working-capital investment | 140,000 | 240,000 |
| Operating cash flow | 860,000 | 860,000 |
Interest and income tax expenses equal cash payments in this example. In an actual file, accruals and deferred taxes may require additional rows. The independently reconstructed operating cash flow must match both the EBITDA bridge and the cash flow statement; leave an unexplained difference visible until it is resolved.
For the role of capex after that checkpoint, see operating cash flow versus free cash flow.
Use Q3 minus Q2 for each input. Reverse the sign of a change in a deduction when explaining its effect on FCF.
| Driver | Effect on Q3 FCF versus Q2 (USD) |
|---|---|
| Higher EBITDA | 120,000 |
| Higher noncash addback | 10,000 |
| Higher cash interest | -15,000 |
| Higher cash taxes | -15,000 |
| Greater working-capital investment | -100,000 |
| Higher capex | -120,000 |
| Total FCF movement | -120,000 |
The proof is $560,000 − $120,000 = $440,000. Collections and inventory explain the operating cash absorption; the equipment payment explains the additional decline after operating cash flow.
Keep the dollar bridge separate from FCF conversion ratios. A percentage summarizes cash generation but does not show which payment or balance movement changed it. For cash before financing effects, use the separate unlevered FCF calculation; the CFA Institute's cash-flow valuation reading explains why EBITDA cannot substitute for a fully specified cash-flow measure.
Bring your financial statements, working-capital schedules and cash capex register as a file or Google Sheet. Covirage maps the columns, and its tools compute and check the bridge; the external AI model explains the movements with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the supporting finance workflow.
Yes. Higher receivables, inventory or capital spending can absorb more cash than the increase in EBITDA provides. Cash interest and tax payments can also rise. A period-by-period bridge identifies which changes offset the improvement in earnings.
Do not subtract depreciation as a cash payment. EBITDA already excludes it. Use actual cash capital expenditures for the reinvestment deduction, and reconcile any tax effects or other adjustments separately rather than treating depreciation as equipment spending.
Start with a clearly documented measure. If management uses adjusted EBITDA, reverse any addbacks that represent cash operating payments before reaching operating cash flow. Preserve a separate reconciliation to the underlying earnings figure so adjustments do not disappear.
Operating cash flow minus capex does not deduct debt principal repayments or include new borrowings. It therefore does not establish the cash available for dividends. Review the debt schedule and other mandatory payments separately before making a distribution decision.