Across more than 2,400 middle-market borrowers, EBITDA grew at a 27% compound annual rate over two years while cash flow from operations grew 8%. If you lend on a cash-flow basis, neither leverage nor fixed charge coverage will show you that.
The finding
In May 2026, KBRA published research covering more than 2,400 unique global middle-market sponsor-backed borrowers for the twelve months ended 31 March 2026.
In its own words: "EBITDA of the population increased at a 27% compound annual growth rate (CAGR) over the last two years, while the median cash flow from operations (CFO) only increased 8%." Over the same period the share of each EBITDA dollar surviving as operating cash fell to 21% from 33% (KBRA, "Private Credit: In Middle Market Direct Lending, Cash Is King," 14 May 2026).
Their conclusion: "Earnings growth is no longer translating into proportional liquidity for many companies."
Twenty-one cents. That is what survives as operating cash out of every EBITDA dollar.
Where the difference goes
Part of it is no surprise. Interest and cash taxes are excluded from EBITDA by construction and both are paid in cash, so they account for some of the gap. Neither is news to a lender; interest coverage exists to track the first.
Most of the rest goes into working capital, which appears nowhere on the income statement. Cash gets tied up in receivables that have not been collected and in inventory that has not sold. A company can book the revenue, report the margin, and never see the money.
Working capital can move three ways.
Three levers, and EBITDA sees none of them
Take a business doing $100,000 of sales a day with $50,000 a day of cost behind it. Each of the following consumes exactly $1 million of cash.
| The move | The arithmetic | Where the cash went |
|---|---|---|
| Customers take 10 days longer to pay DSO 50 to 60 |
10 days × $100k/day = $1.0M |
Tied up in receivables. You are financing your customers for ten more days. |
| You pay suppliers 20 days sooner DPO 65 to 45 |
20 days × $50k/day = $1.0M |
Out the door. You gave up twenty days of supplier financing. |
| You hold 20 days more stock DOH 55 to 75 |
20 days × $50k/day = $1.0M |
Tied up in inventory that has not sold. |
The day counts differ because receivables turn with sales at $100,000 a day, while payables and inventory turn with cost at $50,000 a day.
Revenue is unchanged. So is margin. So is EBITDA, because none of these movements changes what was sold or what it cost. In each case the business simply has a million dollars less cash, and every ratio built on EBITDA reads exactly the same.
What the covenants test
Leverage. Total debt to EBITDA, a maximum. Because it is measured against EBITDA, rising EBITDA improves the ratio even while cash deteriorates. A borrower in this position looks like it is deleveraging.
Fixed charge coverage. The one covenant deliberately built to be cash-aware. It takes EBITDA, subtracts capex, cash taxes and distributions, and asks whether what remains covers interest and scheduled principal. It is genuinely closer to cash than leverage is, and a credit officer will rightly say so.
But it never subtracts the movement in working capital. If receivables grow by a million over the period, that is a million of sales the business has not been paid for, and nothing in the fixed charge calculation reflects it. So a borrower can pass leverage, pass fixed charge coverage, and still be unable to fund capex, pay down debt, or rebuild liquidity. That is exactly the condition KBRA describes.
The information exists. The timing does not.
The cash flow statement is not blind to any of this. Under the indirect method it itemises the movement in receivables, inventory and payables, line by line. That is how KBRA produced the finding in the first place.
So the problem is not that the information is hidden. It is when it arrives, and what is being tested on it.
Financial covenants are typically tested quarterly, on statements delivered thirty to forty-five days after period end. A borrower whose cash began tightening in the second week of a quarter can be four months into the problem before it surfaces on a compliance certificate. By then the inexpensive fixes, a modest amendment, a small equity cure, a change in supplier terms, are usually gone. What remains are the expensive ones.
A quarterly test on a company whose cash moves weekly is not monitoring. It is an autopsy schedule.
What to ask for
Not a different statement. A different frequency, and a different basis.
A rolling 13-week cash flow forecast is a weekly, cash-basis view of receipts and disbursements. Four things separate a useful one from a decorative one:
- It is built on drivers, not on an earnings multiple. DSO, DPO and days on hand are stated as explicit assumptions, so when cash moves you can see which lever did it, and therefore whether it continues.
- It is weekly and rolling. Each week drops off the back and a new one is added at the front, so the window always covers the next quarter rather than the last one.
- It carries actual against forecast. The variance history is where credibility comes from. A borrower whose forecast is consistently wrong in the same direction is telling you something the ratios are not.
- It shows the trough week. Not whether the company is profitable, but which week the balance gets uncomfortable, how far it dips, and whether it threatens a minimum liquidity or availability test.
If a borrower's EBITDA is up and its cash is flat, the useful question is not whether the covenants pass. It is which lever is absorbing it, receivables, inventory or payables, and whether you know that from their reporting or are assuming it.
Watching a credit where the earnings and the cash disagree?
I build rolling 13-week cash flow forecasts for middle-market companies and the lenders monitoring them, at a size where a large advisory firm does not fit the fee structure.
Start a conversationFigures cited are as published by the sources named and as of the dates stated. This article is general commentary, not investment, accounting, or legal advice.