EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
Quick Definition
A widely used profitability metric that strips out financing, tax, and non-cash capital costs to approximate operating cash generation.
Key Takeaways
- EBIT + Depreciation + Amortization = EBITDA
- Approximates operating cash generation before CapEx and financing
- EV/EBITDA is the most popular Wall Street valuation multiple
- Critics argue it ignores real costs of asset replacement (CapEx)
- Best used as a starting point — free cash flow is the ultimate metric
What Is EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)?
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is one of the most commonly used financial metrics in corporate valuation and analysis. It starts with EBIT and adds back depreciation and amortization — two significant non-cash charges. The result approximates the cash profit a business generates from operations before capital structure, tax, and capital expenditure decisions.
EBITDA is widely used because it enables comparisons between companies with different asset bases, capital structures, and tax situations. A capital-light SaaS company and a capital-heavy manufacturer might have very different net incomes and even different EBITs, but EBITDA allows comparison of their operational cash-generating ability. The EV/EBITDA multiple is the most popular valuation metric on Wall Street for this reason. Private equity firms particularly favor EBITDA because they can optimize capital structure (leverage) and tax strategies after acquisition.
However, EBITDA has significant limitations and critics. Warren Buffett famously dismisses it, noting that depreciation is a very real economic cost — factories and equipment do wear out and need replacement. Charlie Munger called EBITDA "bullshit earnings." By ignoring CapEx requirements, EBITDA overstates the true cash available to shareholders. A company with $100M EBITDA but $80M in required CapEx generates only $20M in true free cash flow. EBITDA also ignores working capital changes, stock-based compensation, and one-time items. For these reasons, sophisticated investors use EBITDA as a starting point but ultimately focus on free cash flow for valuation decisions.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) Example
- 1A company with $50M EBIT, $15M depreciation, and $5M amortization has EBITDA of $70M.
- 2Enterprise Value / EBITDA of 10x is a common benchmark for established businesses.
- 3Warren Buffett criticizes EBITDA: "Does management think the tooth fairy pays for capital expenditures?"
Related Terms
EBIT (Earnings Before Interest and Taxes)
A profitability measure showing a company's operating earnings before the impact of capital structure and tax decisions.
EV/EBITDA
A valuation multiple comparing enterprise value to earnings before interest, taxes, depreciation, and amortization—useful for comparing companies with different capital structures.
Depreciation (Accounting)
The systematic allocation of an asset's cost over its useful life, reflecting the gradual consumption of its economic value.
Free Cash Flow (FCF)
The cash a company generates from operations after accounting for capital expenditures, representing money available for dividends, debt repayment, or reinvestment.
Capital Expenditure (CapEx)
Funds spent by a company to acquire, upgrade, or maintain physical assets like property, buildings, equipment, or technology.
Revenue
The total amount of money a company earns from its business activities before any expenses are deducted, also called sales or top line.
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