Investing term
What is EBITDA?
Earnings before interest, taxes, depreciation, and amortization — operating income plus non-cash D&A.
EBITDA is earnings before interest, taxes, depreciation, and amortisation — operating profit with the non-cash D&A charges added back. It's used to compare the core profitability of businesses regardless of how they're financed (interest) or taxed, and stripped of non-cash accounting charges.
That makes it useful for comparing companies with different debt loads, tax situations, or depreciation policies on a more like-for-like basis, and it's a common input in valuation multiples like EV/EBITDA. But it should be treated with caution: by ignoring depreciation, EBITDA pretends the cost of wearing-out assets doesn't exist, which flatters capital-intensive businesses that must keep spending to replace them. And by ignoring interest and tax, it overstates the cash actually available to owners. Charlie Munger memorably dismissed it as 'bullshit earnings' for these reasons.
EBITDA adds non-cash D&A back to operating income for a bigger number, useful for comparing firms. But by ignoring worn assets, interest, and tax, it flatters capital-heavy, indebted companies.
For example
A company with $18M operating income and $7M of depreciation and amortisation reports EBITDA of $25M — a bigger, flattering number that ignores the cost of its wearing assets.
Learn it by doing
That's EBITDA in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).
Try the free lesson →Why it matters to you
EBITDA matters because it's everywhere in valuation and deal-making, so investors need to understand both its use and its dangers. Its strength is comparability across firms with different financing and tax; its weakness is that it excludes very real costs — depreciation of assets that must be replaced, plus interest and tax that owners actually bear. Used as one input among many it's fine; treated as a proxy for cash flow or true profit, it systematically flatters capital-heavy and indebted companies.
⚠ Mistaking EBITDA for cash flow or real profit
EBITDA excludes interest, tax, and depreciation — all real costs an investor bears — so it's not cash flow and not true profit. It especially flatters capital-intensive businesses, which must keep spending to replace depreciating assets, and heavily indebted ones, which owe real interest. Relying on EBITDA as a stand-in for the cash available to owners overstates the economics of exactly the companies where the excluded costs matter most.