EBITDA

EBITDA allows apples-to-apples comparison across companies with different capital structures, tax rates, and depreciation policies. A highly leveraged company and an all-equity company can have vastly different net incomes but similar EBITDAs if their operations are comparable. This is why EV/EBITDA is the default valuation multiple in most M&A and LBO analyses. Banks also use EBITDA as the basis for credit metrics like Debt/EBITDA, which drives how much leverage a company can support in a leveraged buyout.

There are two common approaches. Top-down: start with Net Income and add back Interest, Taxes, Depreciation, and Amortization. Bottom-up: start with Revenue and subtract COGS and Operating Expenses (excluding D&A). Both methods should produce the same result. In practice, bankers often calculate EBITDA directly from the income statement as Operating Income (EBIT) + D&A. Most models also layer in adjustments for one-time items (restructuring charges, stock-based comp) to arrive at Adjusted EBITDA.

EBIT includes depreciation and amortization, making it more conservative than EBITDA. Net Income includes all charges including interest, taxes, and D&A. For capital-intensive businesses (airlines, manufacturing), EBITDA can significantly overstate cash generation because it ignores large CapEx requirements. This is why some analysts prefer EBIT or EBITDA minus CapEx for these industries. In tech and services, where D&A is mostly amortization of intangibles, EBITDA is a closer proxy for cash flow.

EBITDA is not a GAAP metric, and companies can define it differently. It ignores working capital changes, CapEx, and stock-based compensation — all real costs. Warren Buffett famously criticized EBITDA, arguing that depreciation is a real expense because assets wear out and must be replaced. In interviews, acknowledging these limitations shows maturity. The best answer: 'EBITDA is useful for comparing operating performance, but free cash flow is a better measure of actual cash generation.'