Technical / Accounting
EBITDA: The Metric Everyone Uses and No One Agrees On
EBITDA explained: formula, calculation, and why bankers use it. Learn the earnings metric that drives deal valuations.
"EBITDA suggests that capital expenditures, interest, and taxes are not expenses. Which, of course, they are." — Seth Klarman
Concept
EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out financing decisions (interest), tax jurisdiction (taxes), and non-cash accounting charges (D&A) to approximate a company's core operating cash generation. It's not GAAP. It's not on the income statement. It's a proxy for operating performance that lets you compare companies regardless of how they're financed or where they're domiciled.
Intuition
EBITDA exists because bankers needed a quick way to compare companies with different financing, different tax situations, and different accounting histories. It answers: "If I owned this business free and clear, with no debt and no historical baggage, roughly how much cash would it spit out from operations?"
It's not perfect. It ignores maintenance capex, working capital needs, and the reality that assets wear out. But it's fast, it's comparable, and it's the basis for —the single most important multiple in M&A.
Components
Why Remove Interest?
What It Is
Interest expense reflects how a company is financed, not how well it operates. Two identical businesses with different debt levels will have different net incomes but the same EBITDA.
The Logic
When comparing Company A (all ) to Company B (50% debt), their profitability looks different at . But that's a capital structure choice, not an operational one. Stripping interest lets you see the underlying business.
Interview Script
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out financing decisions, tax jurisdiction, and non-cash accounting charges to approximate a company's core operating cash generation, which makes it useful for comparing companies regardless of capital structure. It's the basis for EV/EBITDA, the most important valuation multiple in M&A, though it does ignore maintenance capex and working capital needs.