EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
Profit before interest, taxes, and depreciation — the primary measure of operating profitability.
What it is
EBITDA = Net Income + Interest + Taxes + Depreciation & Amortization
It is the "gross operating profit" stripped of:
- →Financing method (interest — depends on capital structure)
- →Tax environment (taxes — depends on jurisdiction)
- →Depreciation (non-cash costs — depends on historical investments)
EBITDA margin = EBITDA / Revenue. It enables comparison of operating efficiency across companies regardless of their debt or tax burden.
Why track it
EBITDA is the most widely used metric in peer comparison and M&A transactions. The EV/EBITDA multiple tells you how many years of operating profit you are paying for the business.
Monitor the EBITDA margin trend — a rising margin alongside rising revenue signals operating leverage (scaling). A falling margin alongside rising revenue may signal mix-shift or pricing pressure.
Real-world example
Watch out for
EBITDA ignores CAPEX — a company with massive investment needs can have a high EBITDA but negative FCF. That is why we say: "EBITDA is a measure of profit, not cash." Warren Buffett criticized EBITDA as a metric that "treats depreciation as an acceptable expense, but in reality those are dollars going out the door."