EBITDA

What it is

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. Strip out interest (financing costs), tax (varies by jurisdiction), depreciation (the write-down of physical assets), and amortisation (the write-down of intangible assets), and what you're left with is meant to represent the raw operating profitability of the business — what it earns before the capital structure and accounting choices get in the way.

Private equity houses love it. Warren Buffett famously does not. Both positions are defensible, and understanding why tells you a lot about how to use it correctly.

How to calculate it

Or equivalently: Net Income + Interest + Taxes + Depreciation + Amortisation.

Most companies report EBITDA explicitly in their results presentations, alongside adjusted EBITDA — which strips out further items the management deems non-recurring. Treat adjusted EBITDA with scepticism. The adjustments are management's interpretation of what "recurring" means, and that interpretation tends to be consistently flattering.

Why it's useful

EBITDA became popular because it allows comparisons across companies with:

• Different capital structures — one company may be heavily indebted, another debt-free. Stripping out interest lets you compare operating performance without that noise.
• Different depreciation policies — a UK company and a US company may depreciate identical assets at different rates. EBITDA removes that distortion.
• Different tax regimes — useful for cross-border comparisons.

The EV/EBITDA multiple (enterprise value divided by EBITDA) is the preferred valuation metric in M&A, because it captures the full business value including debt and compares it to an earnings figure that's comparable across geographies and capital structures.

The Buffett argument against it

Buffett's critique is blunt: depreciation is a real cost. The capital expenditure that will replace those depreciating assets is not optional. A factory doesn't last forever. Pipes corrode. Aircraft age. Software needs rewriting. Pretending these costs don't exist by using EBITDA rather than free cash flow can dramatically flatter the apparent profitability of capital-intensive businesses.

He's right. For asset-heavy industries — mining, airlines, infrastructure, manufacturing — EBITDA can be almost meaningless as a profit measure. The depreciation charge is a genuine indicator of the ongoing investment the business needs just to stand still.

For asset-light businesses — software, media, consumer brands — EBITDA is much closer to free cash flow because there's little CapEx to offset the depreciation. Here it works reasonably well.

Using it in practice

EV/EBITDA is the multiple you'll see most often in deal announcements, analyst notes, and takeover coverage. A typical acquisition in the UK might be announced at "12 times EBITDA" — meaning the buyer is paying twelve pounds for every pound of EBITDA the target generates.

Average EV/EBITDA multiples vary significantly by sector: technology companies often trade at 20–30x, consumer staples at 12–16x, retailers at 6–10x, and cyclical industrials at 5–8x.

When a company's management quotes EBITDA as the headline number in results without giving equal prominence to free cash flow, it's worth asking why. It often means CapEx is high, debt is elevated, or the underlying business isn't as cash-generative as the headline implies.

Not financial advice. Always review the full financial statements.