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 a business's underlying cash generating capacity. It isn't a GAAP or IFRS metric and doesn't appear on the face of the income statement.

The formula is:

It can equivalently be calculated by taking net income and adding back interest, taxes, depreciation, and amortisation. The logic: 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 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, which is why acquisition multiples like enterprise value divided by EBITDA (EV/EBITDA) are the standard shorthand in most M&A conversations. Its weakness is just as well known: by excluding capital expenditure, it flatters capital intensive businesses that must keep reinvesting just to maintain their asset base, which is why analysts in heavy industries often favor 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 as much a measure of financial engineering as of operating performance.