EBITDA

EBITDA is earnings before interest, taxes, depreciation, and amortization. By stripping out financing costs, tax situations, and non-cash charges, it aims to show the raw operating engine of a business, comparable across countries and capital structures.

The math

Take 400 million dollars of operating income and add back 150 million of depreciation and amortization. The add-back is the whole story.

	Amount
Operating income	$400M
Depreciation and amortization	+ $150M
EBITDA	$550M

For a software company whose amortization reflects old acquisitions, EBITDA may fairly represent cash generation. For a trucking company whose fleet wears out every seven years, that 150 million is a real future bill: the trucks will be replaced with actual dollars, and EBITDA pretends otherwise.

The trap

Accepting adjusted EBITDA as reported. Companies increasingly publish their own versions with restructuring costs, stock compensation, and litigation removed as if they were not costs.

Each adjustment moves the number further from anything a shareholder will ever receive. A famous investing rule of thumb: the more a pitch relies on EBITDA, the more attention the capital expenditures deserve.

The move

Use EBITDA for what it is good at: comparing operational engines across different debt loads and tax regimes, and sizing debt against earnings (net debt to EBITDA is the standard leverage gauge). Then always walk the bridge from EBITDA down to free cash flow: subtract real capex, cash taxes, and working capital needs.

The size of that bridge is the size of the flattery.