EBITDA

EBITDA is earnings before interest, taxes, depreciation and amortization: a company’s operating earnings with four things added back or left out. It is one of the most quoted figures in corporate finance, the denominator of the standard enterprise value multiple, and the number lenders size their loans against. It is also not cash flow, and most of what is worth knowing about it follows from that.

How it is calculated

Accounting standards do not define it and public companies generally do not report it in their filings, so it is worked out from what they do report: take EBIT, the operating income on the income statement, and add back the depreciation and amortization charged in the period, which is found on the cash flow statement[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: EBITDA defined, pp. 36–37; leverage and coverage ratios, pp. 40–41; enterprise value multiples, p. 48.]. Depreciation spreads the cost of buildings and equipment over the years they are used; amortization does the same for intangible assets. Neither is a cash payment in the year it is charged, which is the reason for adding them back.

Why it is used

The case for the measure is comparability. Two companies in the same business can have different interest bills because one borrowed more, different tax bills because they sit in different regimes, and different depreciation because one bought new machines last year and the other put it off. Stripping all three out gives an apples-to-apples comparison of operating performance across companies in a sector, and a widely used proxy for the cash a company’s operations produce[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: EBITDA defined, pp. 36–37; leverage and coverage ratios, pp. 40–41; enterprise value multiples, p. 48.]. That is why enterprise value is usually compared with it: EV/EBITDA “serves as a valuation standard for most sectors”, being independent of capital structure, taxes and the differences in depreciation between companies[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: EBITDA defined, pp. 36–37; leverage and coverage ratios, pp. 40–41; enterprise value multiples, p. 48.]. It is also the yardstick for debt. The ratio of debt to EBITDA is one of the two usual measures of leverage, the other being debt as a share of total capitalisation, and because the denominator stands in for operating cash flow, the ratio reads as roughly how many years of cash flow it would take to repay the debt[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: EBITDA defined, pp. 36–37; leverage and coverage ratios, pp. 40–41; enterprise value multiples, p. 48.]. Lenders write it into loan agreements: the measure is used frequently in setting the financial covenants in debt and credit agreements, often in some adjusted form[2Source 2Charles W. Mulford and Eugene E. Comiskey, Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance (Wiley, 2005), “Lenders and Cash Flow”, p. 12, and “EBITDA”, p. 69.].

Why it is not cash flow

A cash flow statement starts with net income and works through every item that separates earnings from cash. EBITDA stops after the first few. What it leaves out, and one thing it leaves in:

• Changes in working capital. If a company builds inventory, lets receivables grow or pays down stretched payables during the period, it consumes cash that the measure does not see[3Source 3Stephen G. Moyer, Distressed Debt Analysis: Strategies for Speculative Investors (J. Ross, 2004), “Limitations of EBITDA”, pp. 102–103.]. Because it ignores those movements while adding back the non-cash charges, one accounting text describes it as “really more a measure of working capital … generated by operations before interest and taxes” than of cash, and points out the consequence for a lender: unless the lender will accept receivables or inventory in payment, it does not measure the capacity to service debt[2Source 2Charles W. Mulford and Eugene E. Comiskey, Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance (Wiley, 2005), “Lenders and Cash Flow”, p. 12, and “EBITDA”, p. 69.].
• Capital expenditure. Depreciation reflects the using-up of assets that must be maintained or replaced. Adding it back rests on the theory that in any given period such spending is discretionary and can be deferred, and depending on how capital-intensive the business is, analysts may prefer EBIT, or EBITDA less capital expenditure[3Source 3Stephen G. Moyer, Distressed Debt Analysis: Strategies for Speculative Investors (J. Ross, 2004), “Limitations of EBITDA”, pp. 102–103.]. The theory is true of one period and false of all of them.
• Interest and taxes. Both are real cash payments; EBITDA is computed before them, where operating cash flow and free cash flow are computed after them[2Source 2Charles W. Mulford and Eugene E. Comiskey, Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance (Wiley, 2005), “Lenders and Cash Flow”, p. 12, and “EBITDA”, p. 69.], so the figure overstates the cash left for shareholders.
• One-time items, which it leaves in. Severance, write-offs and similar charges are cash costs that are arguably out of the ordinary course, so the figure often needs to be “adjusted” to remove them; a period that is unrepresentative may call for a “normalized” number instead of the reported one[3Source 3Stephen G. Moyer, Distressed Debt Analysis: Strategies for Speculative Investors (J. Ross, 2004), “Limitations of EBITDA”, pp. 102–103.].

The distressed-debt text that lists these limits ends with the practical verdict anyway: despite all of them, EBITDA or a variant of it is the standard proxy for cash flow in practice[3Source 3Stephen G. Moyer, Distressed Debt Analysis: Strategies for Speculative Investors (J. Ross, 2004), “Limitations of EBITDA”, pp. 102–103.].

A worked warning

The subtlest problem is that depreciation is not always a sunk cost. A valuation text argues that in many industries the depreciation of existing assets is the accounting equivalent of setting aside the money that will be needed to replace them, so subtracting it gives a better picture of future cash flow[4Source 4Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies, 7th ed. (Wiley, 2020), ch. 18, “Using Multiples”: the five principles, and “Choosing between EBITA and EBITDA”.]. Its example is two companies that differ in one respect only: company A makes its own products on its own equipment, and company B outsources production to a supplier who charges for its own depreciation in the price.

Line	Company A	Company B
Revenues	1,000	1,000
Raw materials	(100)	(250)
Operating costs	(400)	(400)
EBITDA	500	350
Depreciation	(200)	(50)
EBITA	300	300
Operating taxes	(90)	(90)
After-tax operating income (NOPAT)	210	210
Depreciation added back	200	50
Investment in working capital	(60)	(60)
Capital expenditures	(200)	(50)
= Free cash flow	150	150
Enterprise value	3,000	3,000
EV/EBITDA	6.0x	8.6x
EV/EBITA	10.0x	10.0x

Source: The example in the valuation text cited below, restated; enterprise value is given as 3,000 for both. Negatives in parentheses.

Both businesses are worth the same and produce the same free cash flow, but A shows EBITDA of 500 and B of 350, so on an EV/EBITDA multiple B looks more than 40 percent more expensive. Deduct depreciation and they trade at the same 10 times EBITA, because A’s depreciation is a real stand-in for the 200 it spends each year on equipment[4Source 4Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies, 7th ed. (Wiley, 2020), ch. 18, “Using Multiples”: the five principles, and “Choosing between EBITA and EBITDA”.]. The same text’s advice is to build multiples on EBITA, or on after-tax operating income, rather than on EBITDA[4Source 4Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies, 7th ed. (Wiley, 2020), ch. 18, “Using Multiples”: the five principles, and “Choosing between EBITA and EBITDA”.].

In the wild

EBITDA is the number an LBO’s lenders size the debt against, the number the entry and exit multiples of a leveraged buyoutLeveraged buyoutA leveraged buyout buys a company mostly with borrowed money that the company then repays. How the debt, the sponsor’s equity and the exit fit together.Terms and methods · revised 28 September 2026 · 1,242 words · 4 sources · 6 min apply to, and the denominator of the multiple at the centre of comparable companies analysisComparable companies analysisComparable companies analysis values a business from the multiples similar public companies trade at: choosing peers, spreading the numbers, picking a range.Terms and methods · revised 28 September 2026 · 1,109 words · 3 sources · 5 min. Because it belongs to the whole enterprise, before interest, it pairs with enterprise valueEnterprise value and equity valueEquity value is what the shares are worth; enterprise value is what the whole business is worth to all who fund it. How they link, and why cash is subtracted.Terms and methods · revised 28 September 2026 · 921 words · 4 sources · 5 min and never with equity value alone. And because it is a rearrangement of the income statement rather than a line on any of the three financial statementsThe three financial statementsThe income statement, the balance sheet and the cash flow statement: what each one shows, what period it covers, and the two links that tie them into one model.Terms and methods · revised 28 September 2026 · 1,071 words · 4 sources · 5 min, every figure quoted in a pitch book or a press release was calculated by someone, with adjustments that are theirs.

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  author       = {{xlsx.dev}},
  title        = {{EBITDA}},
  howpublished = {xlsx.dev Wiki},
  year         = {2026},
  month        = sep,
  url          = {https://xlsx.dev/wiki/ebitda}
}