What Is EBITDA and Why Investors Use It
EBITDA strips out financing and accounting choices to show core operating performance. Here’s what it means — and its limits.
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EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It’s a measure of a company’s core operating profitability, before the effects of how it’s financed and how it accounts for assets.
Why investors use it
By adding back interest, tax, depreciation and amortisation to profit, EBITDA tries to show the cash-like earnings from operations:
- Compare like-for-like — two companies with different debt levels or tax situations can be compared on operating performance.
- EBITDA margin — EBITDA as a % of revenue shows operating efficiency.
- Valuation — the EV/EBITDA multiple is widely used, especially for capital-heavy businesses.
EBITDA vs other profit measures
- EBIT keeps depreciation/amortisation (operating profit).
- Net profit is the bottom line after everything.
The important caveats
EBITDA is popular but can mislead:
- It ignores real costs — interest on debt and capex (via depreciation) are genuine expenses. A heavily indebted or capital-hungry business can look healthier on EBITDA than it is.
- Warren Buffett and others have criticised over-reliance on it precisely because depreciation reflects real asset consumption.
Use EBITDA as one lens — always alongside free cash flow, debt and net profit. Education only, not a recommendation.
