Positive EBITDA But Negative FCF? Is this possible?

Yes, it is indeed possible for a company to have a positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) but a negative Free Cash Flow (FCF). Let's break down why this can happen in a way that's easy to understand.

Imagine you're running a lemonade stand business. You sell lemonades for $2 each, and your costs to make each lemonade (including lemons, sugar, cups, and labor) are $1.50. So, your EBITDA is positive because your earnings ($2) are higher than your operating expenses ($1.50), giving you $0.50 in profit for each lemonade you sell.

However, there's more to consider beyond just making lemonades. Let's say you borrowed money to buy the lemonade stand equipment (like the table, the sign, and the blender). You have to pay interest on that loan, let's say $0.25 for each lemonade you sell. Additionally, your blender needs maintenance every few months, costing you $0.10 for every lemonade sold.

So, your EBITDA is still positive because you're making more money from selling lemonades than covering your direct costs and interest expenses. But here's where the negative FCF comes in.

Free Cash Flow (FCF) takes into account all the cash flowing in and out of the business, including capital expenditures (CapEx) required to maintain and grow the business. In your case, you realize that your lemonade stand equipment needs an upgrade. A new and improved blender will cost $1. This is a one-time cost, but it's considered a capital expenditure because it's an investment to improve your business.

Since you're making $0.50 per lemonade and you need to spend $1 on the new blender, your FCF becomes negative. Even though your lemonade sales are generating positive earnings, the need to invest in the business for future growth or maintenance can lead to a negative FCF.

In the real business world, companies might have positive EBITDA due to their core operations generating profits, but they can have negative FCF if they have to invest heavily in things like new equipment, research and development, marketing campaigns, or expanding to new locations. These investments are crucial for the company's long-term success, but they can temporarily lead to negative cash flows because they require upfront expenditures.

So, just like your lemonade stand, a company can experience positive EBITDA but negative FCF due to the balance between operational profits and necessary investments.

Example 1: Amazon

Amazon is known for its positive EBITDA due to its high revenues and efficient operations. However, it has had periods of negative Free Cash Flow (FCF) because of its substantial investments in infrastructure and expansion.

Positive EBITDA: Amazon generates substantial revenues from its e-commerce platform and its cloud computing services (Amazon Web Services - AWS). The revenue from these operations often exceeds their operating expenses, resulting in positive EBITDA.

Negative FCF: Amazon invests heavily in building new fulfillment centers, expanding its delivery network, and developing new technologies. These investments are necessary for the company's growth and future profitability, but they require significant upfront spending. As a result, even though Amazon has positive EBITDA, its Free Cash Flow can turn negative during periods of aggressive expansion.

Example 2: Tesla

Tesla, the electric car manufacturer, is another example where positive EBITDA and negative FCF have been observed.

Positive EBITDA: Tesla generates revenue by selling electric vehicles and energy products. Its innovative technology and strong demand have led to positive EBITDA, as the sales often cover the production costs and operating expenses.

Negative FCF: Tesla spends substantial amounts on research and development for new vehicle models and battery technology. Additionally, building out its manufacturing facilities and charging infrastructure requires significant capital expenditure. These investments can cause the company to have negative Free Cash Flow despite its positive EBITDA.

Example 3: Uber

Positive EBITDA: Uber's ride-hailing and food delivery services generate revenue that often exceeds its operational expenses, leading to positive EBITDA.

Negative FCF: Uber has invested heavily in expanding its services to new markets, developing autonomous driving technology, and improving its platform. These investments require significant capital expenditure, contributing to periods of negative Free Cash Flow.

Example 4: Netflix

Positive EBITDA: Netflix generates revenue from its subscription-based streaming service. The revenue from its subscribers often covers its content creation and licensing costs, resulting in positive EBITDA.

Negative FCF: Netflix spends a substantial amount on producing and acquiring original content, as well as marketing to attract new subscribers. While these investments are aimed at driving subscriber growth and retention, they can lead to negative Free Cash Flow as the company pays upfront for content that will be consumed over time.

Example 5: Technology Startups

Many technology startups can have positive EBITDA due to their innovative products or services gaining traction and generating revenue.

Negative FCF: However, startups often require significant investment in research and development, marketing, and scaling their operations. These investments are crucial to establish their presence, but they can lead to negative Free Cash Flow as the company spends more than it generates in cash during the initial growth phases.

Example 6: Biotech Companies

Biotech companies may have promising drug candidates in their pipelines that can lead to positive EBITDA from licensing agreements or early-stage sales.

Negative FCF: Developing new drugs is a capital-intensive process, involving clinical trials, regulatory approvals, and manufacturing setup. These investments can cause negative Free Cash Flow as the company spends on R&D without immediately realizing substantial revenues.