EBITDA

Earnings before interest, taxes , depreciation, and amortisation (EBITDA) is a measure of operating profitability that strips out financing decisions, tax jurisdictions, and non-cash accounting charges to get closer to the underlying cash-generating capacity of a business.

It is not a GAAP or IFRS metric and does not appear on the face of the income statement. It is calculated by taking operating profit and adding back depreciation and amortisation or equivalently by taking net income and adding back interest, taxes, depreciation, and amortisation.

The logic is that depreciation and amortisation are non-cash charges reflecting past capital decisions rather than current operating performance, interest expense reflects how a company chose to finance itself rather than how well it operates, and taxes vary by jurisdiction and structure in ways that obscure comparison.

EBITDA is the dominant metric in leveraged finance and private equity because it approximates the cash a business generates to service debt. This is why acquisition multiples. Enterprise value divided by EBITDA (EV/EBITDA) are the standard valuation shorthand in most M&A conversations.

Its weakness is equally well known. By excluding capital expenditure, it flatters capital-intensive businesses that must continuously reinvest just to maintain their asset base. This is why Warren Buffett has called it a misleading metric and why analysts in heavy industries often prefer EBIT or free cash flow instead.

Adjusted EBITDA compounds this further. Companies add back restructuring charges, stock-based compensation, and one-time costs. Sometimes aggressively, to the point where the gap between reported and adjusted EBITDA becomes a measure of financial engineering as much as operating performance.