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L.5 · BEGINNER · 3 MIN

EBITDA: What It Is and Isn't

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a profit measure that strips out four things outside the operating business itself: how the company is financed (interest), what tax position the company sits in (taxes), and two non-cash accounting charges (depreciation and amortization). What you are left with is a rough proxy for 'what the operating business actually generates.'

Quiz · 5 questions ↓
§ 01
EBITDA = Operating Income + Depreciation + Amortization
§ 02
MeasureStrips OutWhat Remains
Net IncomeNothingBottom-line profit. Comparable within a company over time.
Operating IncomeInterest + TaxesHow the business itself performs — without financing decisions.
EBITDAInterest + Taxes + D&AOperating Income further stripped of non-cash charges.
Free Cash FlowAdds back D&A but SUBTRACTS CapExWhat is actually available to owners after maintenance investment.
§ 03

EBITDA was popularized in the 1980s for leveraged buyouts — deals where the buyer borrows most of the purchase price. Two companies in the same industry with different debt loads and different tax rates can report very different Net Income — but similar EBITDA. That makes EBITDA useful for comparing OPERATING quality across companies with different capital structures.

§ 04
Pick any ticker on the platform. Find Operating Income and D&A on the cash-flow statement. Add them: that is EBITDA. Now check the calculated EBITDA on the company page — it should match within $50M. If it does not, the company is using a non-standard adjustment (Adjusted EBITDA).
§ 05

EBITDA is gameable in two ways. (a) Companies report 'Adjusted EBITDA' with management-defined add-backs (stock-based compensation, restructuring charges, 'one-time' legal settlements). Read the footnote. Companies that add back stock-based compensation are claiming a real cost does not exist. (b) Even un-adjusted EBITDA ignores capital expenditures, which are real cash outflows. Warren Buffett put it bluntly: 'Does management think the tooth fairy pays for capex?' For a software company with low CapEx, EBITDA is close to free cash flow. For a manufacturer or utility, EBITDA can be 2-3x the actual cash the business generates. The rule of thumb: always check EBITDA against free cash flow before using it as a quality signal.

§ 06

EBITDA = a comparability tool, not a 'true profit' measure. Use it to compare operating performance across companies with different debt, tax, and asset-life profiles. Always pair it with free cash flow when judging the underlying business.

Five questions · AI feedback

Sit with the ideas.

Company A reports Operating Income of $200M, Depreciation of $80M, Amortization of $20M, Interest Expense of $30M, and Income Tax of $40M. What is Company A's EBITDA?

Why:

Other lessons in this course.

  1. 01The Income Statement: How Much Did They Earn?
  2. 02The Balance Sheet: What Do They Own and Owe?
  3. 03Liquidity: How Easily You Can Reach Your Cash
  4. 04Cash Flow: Follow the Money
  5. 05EBITDA: What It Is and Isn't— reading now
See it on a real ticker →