What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a widely used financial metric that approximates a company's operating cash flow by removing the effects of financing decisions, tax environments, and non-cash accounting charges from the earnings calculation.

EBITDA is the most commonly referenced profitability metric in consulting and private equity. It strips out interest (a function of capital structure), taxes (varying by jurisdiction), and depreciation/amortization (non-cash charges) to provide a cleaner view of operational performance. This makes it useful for comparing companies across different capital structures, tax regimes, and asset bases.

Enterprise Value / EBITDA (EV/EBITDA) is one of the most popular valuation multiples. A company trading at 8x EBITDA means its enterprise value is eight times its annual EBITDA. Industry-specific multiples vary widely—software companies might trade at 20-30x while industrial companies trade at 6-10x.

However, EBITDA has limitations. It ignores capital expenditure requirements—a capital-intensive business might have strong EBITDA but little free cash flow after maintaining its assets. Warren Buffett has criticized EBITDA as misleading because depreciation represents real economic costs. In interviews, showing awareness of EBITDA's limitations demonstrates financial sophistication.

Real-world example

When private equity firm KKR evaluated acquiring Walgreens Boots Alliance, EBITDA was the primary metric for valuation. At roughly $7B EBITDA and a 10x multiple, this implied an enterprise value of approximately $70B.

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What is EBITDA?

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