EBITDA
FundamentalsEarnings before interest, taxes, depreciation, and amortisation — a proxy for raw operating cash generation before financial engineering gets involved.
EBITDA strips away four non-operating or non-cash expense categories to isolate the earnings power of the core business: Interest (financing decisions), Taxes (jurisdiction-specific, not operational), Depreciation (non-cash reduction of asset value), and Amortisation (non-cash reduction of intangible asset value). The result is a metric that approximates operating cash flow and allows cross-company comparison regardless of capital structure, tax environment, or accounting treatment of fixed assets. EBITDA is the most commonly used denominator in enterprise value multiples (EV/EBITDA), the primary metric in leveraged buyout analysis, and the standard measure of debt serviceability in credit agreements (debt covenants are almost always expressed as multiples of EBITDA).
Start with Net Income (the bottom line). Add back Interest (debt financing costs), Taxes (government's cut), Depreciation (non-cash cost of physical assets aging), and Amortisation (non-cash cost of intangible assets like patents aging). What remains is core operating earning power.
The business generates significant operating cash for every dollar of revenue. Typical of high-quality SaaS, pharma, or businesses with strong pricing power.
Operationally profitable with room to improve. Common in retail, industrials, and growing businesses still scaling their cost structure.
Thin operating margins. Could indicate intense competition, high input costs, or a business model that doesn't scale well. Negative EBITDA means the core operations are losing money.
EBITDA is the universal language of business valuation. When you hear a company was acquired for '12× EBITDA,' that's the EV/EBITDA multiple — enterprise value relative to operating earnings power. It's also how banks determine whether a company can service its debt. Most loan covenants require total debt to be below 4–5× EBITDA. Understanding EBITDA is the difference between reading a headline and actually understanding what it means.
Warren Buffett famously called EBITDA a 'misleading' metric because it adds back depreciation — but depreciation exists because assets wear out and need to be replaced. A manufacturing company that ignores capex requirements by focusing on EBITDA is painting an unrealistically rosy picture. EBITDA is useful for comparison and debt analysis, but free cash flow is the more honest measure of what the business actually generates for shareholders.