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Valuation

EBITDA

Also known as: Earnings Before Interest, Taxes, Depreciation and Amortization, Operating Cash Proxy

EBITDA is earnings before interest, taxes, depreciation, and amortization, a widely used proxy for a company’s core operating profitability.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. By stripping out financing decisions (interest), tax regimes, and non-cash accounting charges (depreciation and amortization), it aims to show the underlying profitability of a company’s core operations.

Why investors and buyers lean on it

EBITDA lets you compare businesses with different debt levels, tax situations, and asset bases on a closer to like-for-like basis. It also forms the denominator of the EV/EBITDA multiple and the starting point for EBITDA add-backs in a deal.

Its limits

EBITDA ignores real costs. Capital-intensive businesses still must replace equipment, and interest on debt is a genuine obligation. Critics point out that EBITDA can flatter companies that consume a lot of cash, so it is best read alongside free cash flow, not instead of it.

Related terms

EV/EBITDA Multiple

The EV/EBITDA multiple divides enterprise value by EBITDA, showing how many dollars investors pay for each dollar of operating profit, independent of capital structure.

EBITDA Add-Backs

EBITDA add-backs are one-time, non-recurring, or owner-specific expenses added back to reported EBITDA to show the company’s true ongoing earning power.

Free Cash Flow

Free cash flow is the cash a business generates after funding the operating expenses and capital investments needed to maintain and grow it.

Enterprise Value

Enterprise value (EV) is the total value of a business to all its investors, calculated as equity value plus net debt, and it is the basis for most valuation multiples.

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