Definition
EBITDA isolates operating performance from capital structure (interest expense), tax jurisdiction (taxes), and non-cash accounting (depreciation and amortization). It's widely used because it enables cleaner cross-company comparisons and is a favorite metric in private equity, M&A valuations, and leveraged buyouts. Common valuation multiples: EV/EBITDA around 8–12× for mature businesses, 15–25× for high-growth software companies. EBITDA has legitimate criticism: it ignores capital expenditures needed to maintain operations (a serious flaw for asset-heavy businesses), can mask deteriorating working capital, and enables 'add-back' abuse where questionable expenses get labeled non-recurring. Warren Buffett famously called it 'earnings before the bad stuff'.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Alternative starting point: Operating Income + Depreciation + Amortization. Both should produce the same figure.
Example
A company reports Net Income of $50M, Interest $10M, Taxes $15M, Depreciation $20M, Amortization $5M. EBITDA = 50 + 10 + 15 + 20 + 5 = $100M. If enterprise value is $1.2B, EV/EBITDA = 12× — reasonable for a mid-tier industrial.
Frequently Asked Questions
Why is EBITDA popular?
It enables comparison of companies across different tax jurisdictions, capital structures, and depreciation policies. It's also a rough proxy for cash generation before capex — useful for debt capacity analysis.
What's the difference between EBITDA and free cash flow?
EBITDA ignores capital expenditures (capex), working capital changes, and cash taxes. Free cash flow subtracts all of these — so FCF is a better measure of actual cash generation.
Is EBITDA a good valuation metric?
It's useful but incomplete. Adjust for maintenance capex (needed to run the business) to avoid overstating cash generation. Never use it in isolation for asset-heavy businesses where depreciation is real economic cost.