EBITDA

EBITDA is earnings before interest, tax, depreciation, and amortisation — a rough view of core operating cash earning.

A quick example

What it means for you

It lets you compare operating performance across firms with different debt and tax situations.

Picture this

A cable company has $2 billion of EBITDA and $11 billion of debt. A private-equity buyer uses an EV/EBITDA multiple to justify the purchase price, pointing to the steady cash-like earnings. But the network needs constant reinvestment to keep customers, and the debt service eats much of the EBITDA. When interest rates rise, the deal sours. EBITDA told the buyer how strong the cash engine looked; free cash flow would have shown how much of it was actually left over.

Common mix-ups

Sellers love it; critics note it hides the cost of maintaining assets and debt loads.

How to apply it

Use EBITDA as a quick screen, then always check free cash flow and interest coverage before trusting it. In valuation, EV/EBITDA is common precisely because it adds debt back — but verify capex needs separately.

Key takeaway

EBITDA is a useful comparison tool and a dangerous shortcut. It strips out interest, tax, depreciation, and amortisation to compare operations across firms, but it ignores the real cash needed to replace worn-out assets and the debt that must be serviced. A company can post positive EBITDA while burning cash and drowning in interest. Use it as a quick screen, then always check free cash flow and interest coverage before trusting it.

Definitions reviewed by the Investing Glossary editorial team.