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Finance

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of core operating profitability that strips out financing and accounting decisions.

EBITDA is popular because it allows comparison across companies with different capital structures (some use lots of debt, some don't) and different depreciation policies (which vary by industry and accounting choices). By removing interest, taxes, depreciation, and amortization, you get something closer to operating cash flow.

But EBITDA has critics, including Warren Buffett, who calls it a misleading metric because it ignores depreciation — and depreciation reflects real asset wear that needs to be replaced with real capital expenditure. Companies love using EBITDA when it makes them look better; investors should always ask "so what happens when we add back all the things you removed?"

EBITDA is like judging a chef purely on the taste of their food — ignoring the rent on the kitchen, the loan on the equipment, and the taxes on the business. It isolates the raw cooking ability. Similarly, EBITDA strips away financial and accounting choices to reveal whether the core business itself is generating value.

Real world: Private equity firms are obsessed with EBITDA. When they buy a company, they use a multiple of EBITDA to value it — "10x EBITDA" is a common benchmark in certain industries. A company with £5 million EBITDA might sell for £50 million. The acquirer then tries to grow EBITDA rapidly and resell at a higher multiple — pocketing the difference. It's the engine of the entire PE industry.

💡 EBITDA is a useful shortcut for comparing businesses — just remember it's a starting point, not the whole story.

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EBITDA — The Dollar Dictionary

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EBITDA