EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It measures a company’s operating performance by stripping out costs that vary based on financing decisions, tax jurisdictions, and accounting methods.
The formula is straightforward: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation. Alternatively, start from operating income and add back depreciation and amortisation.
You’ll hear this when…
EBITDA is everywhere in corporate finance. It’s the go-to metric for comparing companies’ operating performance, especially across industries or countries where tax regimes and capital structures differ.
In mergers and acquisitions, company valuations are frequently expressed as a multiple of EBITDA. “They sold for 8x EBITDA” means the purchase price was eight times the company’s annual EBITDA.
Lenders use it too — a common loan covenant is a maximum debt-to-EBITDA ratio. If a company’s ratio exceeds the threshold, it triggers a default.
The criticism
EBITDA’s biggest weakness is that it ignores real costs. Depreciation and amortisation represent the wear on assets that will eventually need replacement. Interest is a real obligation. Critics (Warren Buffett famously among them) argue that EBITDA can make companies look healthier than they are by excluding expenses that affect cash available to investors.
For more context on how EBITDA fits into the broader landscape of finance jargon, see the jargon you’ll actually hear in your first finance job.
Source: SEC filings and investor relations disclosures commonly reference EBITDA as a non-GAAP financial measure.