Why Use EBITDA

The biggest reason to use EBITDA is that it measures operating performance BEFORE the effects of how a company is financed and taxed. Two identical businesses — one all-equity, one heavily levered — will report very different net income because of interest expense, and different effective tax rates depending on jurisdiction. EBITDA backs out interest and taxes, so both companies show the same operating profitability. This is essential in comparable companies analysis: you want to compare the businesses, not their balance sheets. It's also why EBITDA pairs with enterprise value (a capital-structure-neutral numerator) rather than equity value in a multiple.

By adding back depreciation and amortization — large non-cash charges that depend heavily on accounting choices and past acquisition prices — EBITDA gets closer to the actual cash a business throws off from operations than net income or even EBIT. Depreciation policy varies widely across companies and is not a current cash cost, so removing it improves comparability. For capital-light businesses (software, services), EBITDA is a reasonable cash-flow proxy; this is also why LBO sponsors anchor on EBITDA — debt capacity is sized as a multiple of EBITDA via the debt-to-EBITDA ratio.

Because it normalizes away financing, taxes, and accounting depreciation, EBITDA lets you line up a portfolio of comparable companies and read relative valuation off a single multiple. It's the lingua franca of M&A and leveraged finance: deal sizes are quoted as 'X turns of EBITDA,' covenants are written against it, and management uses adjusted EBITDA to present 'normalized' earnings. Its ubiquity is itself a reason to use it — when everyone prices off EV/EBITDA, you need it to speak the market's language, even if you also run a discounted cash flow for a more rigorous view.