EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company core operating profitability by adding back non-cash charges and financing costs to net income, providing a cleaner view of cash generation.
A manufacturing company reports: Net Income $30M, Interest Expense $10M, Taxes $10M, Depreciation $20M, Amortization $5M. EBITDA = $30M + $10M + $10M + $20M + $5M = $75M. The company's EV/EBITDA multiple (Enterprise Value ÷ EBITDA) is used to compare it to peers. If the enterprise value is $750M, EV/EBITDA = 10x. A competitor with EBITDA of $50M and EV of $600M trades at 12x — the first company appears relatively cheaper on an EV/EBITDA basis.
EBITDA strips out the effects of financing decisions (interest), tax jurisdictions (taxes), and accounting choices (depreciation and amortization) to show pure operating performance. This makes it useful for comparing companies with different capital structures, tax rates, and depreciation policies. It's particularly popular in private equity, M&A, and leveraged buyout analysis because it approximates the cash flow available to service debt.
EBITDA became the standard metric for valuing businesses in private equity and M&A. The EV/EBITDA multiple is preferred over PE ratio for several reasons: it accounts for debt (using enterprise value instead of market cap), it's capital-structure neutral (adding back interest), and it removes the distortion of depreciation policies. A typical LBO targets companies with stable EBITDA that can support 4-6x debt leverage. The private equity firm buys the company at 8-10x EBITDA, uses 60-70% debt financing, improves EBITDA over 5 years, and sells at the same or higher multiple.
However, EBITDA has well-known critics. Warren Buffett famously said that EBITDA is not a useful measure of earnings because depreciation is a real economic cost — factories and equipment must eventually be replaced. Charlie Munger called it "bullshit earnings." For capital-intensive businesses like airlines, manufacturing, and telecom, EBITDA can be wildly misleading because it ignores the massive ongoing capital expenditure required to maintain the business. A better metric is EBITDA minus capital expenditures (sometimes called "EBITDA-CapEx" or "free cash flow before interest and taxes").
Private equity firms transformed the restaurant industry using EBITDA-based valuations. When Roark Capital bought Subway for approximately $9.6 billion in 2024, the deal was priced at roughly 15x EBITDA. Subway's EBITDA of approximately $600-700 million was the key metric determining the purchase price — not net income, which was much lower due to high depreciation on restaurant assets and debt from previous restructurings. This illustrates how EBITDA drives real-world business valuations.
Always calculate EBITDA minus CapEx: This 'maintenance EBITDA' shows what the business actually generates after maintaining its asset base. For capital-intensive businesses, this can be 30-50% lower than reported EBITDA.
Use EV/EBITDA for comparing acquisition targets: Enterprise Value accounts for both equity and debt, making EV/EBITDA superior to PE ratio when comparing companies with different leverage levels. A company with low PE but high debt might look cheap but isn't.
Reconcile 'adjusted EBITDA' to GAAP: Companies often present 'adjusted EBITDA' that adds back stock-based compensation, restructuring costs, and other items. Read the footnotes to understand what's being added back and whether those adjustments are reasonable.
Calculate EBITDA instantly:
Try EBITDA Calculator →What is EBITDA and why is it controversial?
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures operating profitability without accounting and financing effects. Supporters say it enables comparison across companies with different capital structures. Critics (including Warren Buffett) argue it ignores real costs — depreciation and amortization reflect actual asset consumption. Always check "EBITDA to real cash" conversion.
What is a good EBITDA margin?
Above 20% is strong for most industries. Software companies often hit 30-40%. Capital-intensive businesses may have 10-15%. The key trend: improving EBITDA margins suggest operating leverage — revenue growth is outpacing cost growth, meaning each additional dollar of revenue generates more profit.
What is adjusted EBITDA?
Companies often report "adjusted EBITDA" that excludes one-time charges, stock-based compensation, restructuring costs, and other items. This can be legitimate or aggressive. If a company has "one-time" charges every quarter, they're not really one-time. Always compare adjusted EBITDA to GAAP EBITDA to see what's being excluded.