Glossary
EBITDA
Earnings before interest, taxes, depreciation and amortization; a rough, non-GAAP proxy for operating cash profit.
EBITDA is earnings before interest, taxes, depreciation and amortization. It starts with operating profit and adds back depreciation and amortization, two large expenses that do not involve writing a check in the current period. The result is a rough stand-in for the cash a company's operations generate before financing, tax and reinvestment. Lenders and acquirers use it heavily, and it anchors the popular EV/EBITDA multiple.
Worked example
Why people use it
- It compares operating performance across companies with different debt levels, tax situations and depreciation policies.
- Bank loan covenants are often written in terms of debt-to-EBITDA, such as a limit of 4 times.
- For buyout firms it approximates the cash available to service acquisition debt.
Why it draws criticism
EBITDA is not defined by US GAAP, so every company can calculate it slightly differently, and "adjusted EBITDA" can strip out stock-based pay, restructuring and other recurring costs. Most importantly, depreciation reflects real spending: equipment wears out and must be replaced. For capital-intensive businesses, Free cash flow (FCF) or EBIT gives a more honest picture. EBITDA also ignores changes in Working capital, so it can stay strong while cash drains into inventory and receivables.