What Is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It starts with operating profit and adds back the two big non-cash expenses, giving a rough measure of the cash a company's operations throw off before capital structure and taxes enter the picture.
The most common calculation is EBITDA = Operating Income + Depreciation + Amortization, though it can also be built from net income by adding back interest, taxes, D&A. Because it is not defined under GAAP, companies sometimes present adjusted versions that exclude one-time items.
How It Works
Interest depends on how much debt a company carries, taxes depend on jurisdiction and history, and D&A depends on past investment decisions and accounting choices. By removing all three, EBITDA lets analysts compare the underlying operating engines of businesses with very different balance sheets.
This is why EBITDA dominates M&A and leveraged finance: acquirers quote purchase prices as EV/EBITDA multiples, and lenders size debt packages as a multiple of EBITDA, such as 5.0x leverage.
Example
A manufacturer reports $10 million of revenue, $6 million of operating costs excluding D&A, and $1 million of depreciation, giving operating income of $3 million. EBITDA is $3 million + $1 million = $4 million. If a buyer offers 8.0x EBITDA, the implied enterprise value is $32 million.
Limitations and Why It Matters
EBITDA is not cash flow. It ignores capital expenditures, working capital needs, and the very real cost of interest and taxes, which is why Warren Buffett has famously mocked it. A capital-intensive business can post strong EBITDA while burning cash every year.
Even so, EBITDA is arguably the single most-used metric in investment banking and private equity, and interviewers routinely ask candidates to define it, calculate it, and defend or attack it as a valuation yardstick.
