Glossary
EBITDA: What It Means, What It Tells You, and What It Hides
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a measure of a company’s operating earnings before the effects of financing, tax structure, and non-cash accounting charges, used to compare businesses and to value them. In a deal, price is usually expressed as a multiple of EBITDA, which is why how it is calculated matters enormously.
What EBITDA actually tells you
EBITDA approximates the cash a business generates from operations, stripped of decisions that vary from owner to owner: how the business is financed, what tax position it sits in, and how it depreciates its assets. That makes it useful for comparing two businesses on operating performance alone.
EBITDA in simple terms
Start with net profit, then add back interest, taxes, depreciation, and amortization. What remains is a rough picture of operating earnings before those four items. It is a proxy, not a precise cash-flow figure.
What EBITDA hides
The common critique, often attributed to investors who avoid the metric, is that EBITDA ignores real costs. It leaves out the capital a business must reinvest to keep earning (maintenance capital expenditure) and the working capital growth ties up. A business can show healthy EBITDA and still consume cash. This is exactly why a Quality of Earnings analysis goes beyond EBITDA to test capex needs, working capital, and the quality of the earnings themselves.
Adjusted EBITDA and add-backs
The EBITDA a seller presents is usually “adjusted,” meaning normalized for owner-specific, one-time, and non-operating items. Each adjustment is only as credible as the add-back behind it, which is why diligence verifies them one by one.
Frequently asked questions
What does EBITDA tell you?
It shows operating earnings before interest, taxes, depreciation, and amortization, so two businesses can be compared on operations regardless of financing or tax structure.
What is EBITDA in simple terms?
Net profit plus interest, taxes, depreciation, and amortization added back. It is a rough proxy for operating cash earnings.
Is a 20% EBITDA margin good?
It depends entirely on the industry. A 20% margin is strong in some sectors and ordinary in others, so margins are only meaningful compared to peers in the same business.
Why do some investors distrust EBITDA?
Because it ignores the cash a business must reinvest as capital expenditure and the working capital growth consumes. Earnings can look healthy while cash does not.
Where to next
See how presented earnings are normalized in the EBITDA normalization entry, how it differs from seller’s discretionary earnings, and the full Quality of Earnings due diligence guide. To test the EBITDA on a specific deal, contact our transaction advisory team.
