Free Cash Flow vs EBITDA: Key Differences for SaaS Companies

~1 min read

EBITDA and FCF are both popular measures of cash generation, but they answer different questions. Understanding the difference helps you communicate financials clearly to investors and make better capital allocation decisions.

What EBITDA measures

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA normalizes earnings by removing: - Interest expense (capital structure choices) - Tax rates (jurisdiction differences) - Depreciation and amortization (non-cash charges)

EBITDA is useful for comparing profitability across companies with different capital structures, depreciation policies, or tax rates. It's also a common input for LBO models and debt covenants (Net Debt / EBITDA).

What FCF measures

FCF = Operating Cash Flow − Capital Expenditures

FCF goes further than EBITDA: it subtracts actual cash invested in capital expenditures. Unlike depreciation (which EBITDA adds back), capex is real cash leaving the business.

FCF answers: "After paying for the investments needed to sustain and grow the business, how much cash remains?"

Why the gap matters

For SaaS companies with minimal capex (servers, laptops), EBITDA ≈ FCF. The difference is usually 2–5% of revenue.

For capital-intensive businesses, the gap is dramatic:

Business type EBITDA Margin Capex / Revenue FCF Margin
Cloud SaaS 20% 2% 18%
On-premise software 25% 5% 20%
Telecom 35% 20% 15%
Manufacturing 15% 12% 3%

When to use each

Use EBITDA when: - Comparing companies in the same industry with different capital structures - Calculating leverage ratios (Net Debt/EBITDA) - Doing LBO or M&A valuation analysis

Use FCF when: - Valuing equity (P/FCF multiple) - Assessing true cash generation quality - Deciding dividend or buyback capacity - Evaluating capex-heavy vs asset-light business models

For investor-facing reporting, FCF is the higher-quality signal. EBITDA can be padded; FCF requires actually having cash in the bank.

Calculate FCF at the Free Cash Flow Calculator.

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Use our free Free Cash Flow Calculator to run the numbers for your own business.

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