equity: reading 43: Q11: EBITDA and depreciation available, companies, solution, reading, account

ryanlb

reading 43, Q11, page 460: solution gives “EBITDA does not account for the company’s reinvestments in operating assets. SO, EBITDA overstaes the funds available to stockholders if reinvestment needs exceed depreciation charges, which is the case for growing companies….”
I don’t get how does it mean by compare the depreciation…. Thanks.

amqata

Well, FCInv and Dep can counter each other, so that the net effect is zero. EBITDA does not take into account situations where FCInv  Dep, because those invested funds are required to keep the business running and are not practically available to shareholders.