What does EBITDA stand for?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It strips out financing decisions (interest), tax jurisdictions (taxes), and non-cash accounting charges (D&A) to show operating profit from the core business.

What is a good EBITDA margin?

EBITDA margin = EBITDA ÷ Revenue. Software companies often achieve 25–40%+. Manufacturers might be 12–18%. Retailers may be 5–10%. Always compare within the same sector — capital intensity and business model drive massive differences.

What is EV/EBITDA and how do I use it?

EV/EBITDA = Enterprise Value ÷ EBITDA. It's the most common acquisition valuation multiple. A company bought at 10× EBITDA means the buyer paid 10 years of current EBITDA. Lower multiples suggest cheaper valuation; 8–12× is typical for mature businesses, 15–25× for high-growth ones.

Why do critics say EBITDA is misleading?

Charlie Munger and Warren Buffett have criticised EBITDA for ignoring real costs. Depreciation represents real asset wear-out — eventually you must replace the equipment. Adding it back flatters capital-intensive businesses. "EBITDA pretends capex doesn't exist" is the common critique.

What Is EBITDA? Definition, Formula, and When It's Useful

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. Starting from operating profit (EBIT), you add back the non-cash charges of depreciation and amortisation:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation

Or equivalently: Operating Income + Depreciation + Amortisation.

The idea is to show the cash-generating power of the core business, stripped of financing choices, tax situations, and accounting conventions that vary by company and country.

Why EBITDA is widely used

Comparability across companies: Two companies in the same business might have very different net income due to different debt levels (interest), tax strategies, or past acquisition accounting (amortisation of intangibles). EBITDA normalises for all of these.

M&A and leveraged buyouts: When private equity firms buy companies, they use EV/EBITDA as the primary valuation metric because they can swap out the capital structure entirely. The EBITDA of the operating business is what they're really buying.

Debt covenants: Many loan agreements require companies to maintain minimum EBITDA coverage ratios (e.g., Net Debt / EBITDA below 4×). Banks use EBITDA to measure a company's ability to service debt.

EV/EBITDA: the key valuation multiple

EV/EBITDA = Enterprise Value ÷ EBITDA

This is arguably the most important acquisition multiple in corporate finance. Typical ranges:

Mature industrials/retail: 6–10×
Consumer brands, healthcare: 10–15×
High-growth tech/software: 15–30×
Fast-growing SaaS: 30–80× (in growth phases)

A company trading at 7× EV/EBITDA when its sector peers trade at 12× is either cheap or has a quality problem — always investigate which.

The legitimate criticisms of EBITDA

Warren Buffett and Charlie Munger have both criticised EBITDA's use as a proxy for cash flow, and the criticism is valid:

Depreciation is a real cost. When a manufacturer's equipment wears out, it must eventually be replaced. Adding depreciation back implies the capex never happened — which is false for capital-intensive businesses. A company spending $300M/year on maintenance capex has a very different cash reality than EBITDA suggests.

It's not actual cash flow. Working capital changes can consume significant cash — a company growing rapidly may consume $50M more cash in receivables and inventory than EBITDA implies. Use free cash flow alongside EBITDA.

EBITDA is most reliable for asset-light businesses (software, services) where depreciation truly is minimal and working capital is stable.

Key takeaways

EBITDA = operating profit with D&A added back. Normalises across companies with different capital structures.
EV/EBITDA is the go-to acquisition multiple in M&A and private equity.
Useful for cross-company comparison; misleading for capital-intensive businesses where capex is large.
Always cross-check EBITDA with free cash flow — the gap between them reveals the real capex and working capital burden.