EBITDA

A measure of operating profitability that strips out financing decisions (interest), accounting choices (depreciation/amortization), and tax environments. Widely used as a proxy for cash generation and in valuation multiples (EV/EBITDA). EBITDA is not a GAAP/IFRS metric — adjustments vary widely across companies. Common adjustments include management fees, non-recurring items, and share-based compensation. Leveraged buyout (LBO) models are typically built on EBITDA multiples.

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Alternatively, EBITDA = EBIT (operating profit) + Depreciation + Amortization. Adjusted EBITDA (also called "clean EBITDA" or "run-rate EBITDA") adds back non-recurring items: restructuring charges, M&A costs, litigation settlements, management bonuses that won't recur post-acquisition, and the impact of IFRS 16 lease capitalization. In LBO transactions, EBITDA is the key driver of both purchase price and debt capacity — typical LBO financing is 4-6x EBITDA.

EV/EBITDA is the most commonly used valuation multiple in M&A. It allows comparison across companies with different capital structures (debt levels) and tax rates. Typical ranges (2024): SaaS/tech companies: 15-40x; industrials: 7-12x; retail: 5-8x; professional services: 8-15x. A low EV/EBITDA multiple relative to peers may signal a value opportunity or underlying quality concerns. High multiples signal growth expectations or scarcity premium.

Critics of EBITDA note that it ignores capex requirements (a capital-intensive business with high EBITDA but low free cash flow is not as valuable as EBITDA suggests), working capital dynamics, and the reality that depreciation reflects real asset consumption. Warren Buffett famously called EBITDA "earnings before a lot of bad things." For capital-light businesses (software, professional services), EBITDA closely approximates free cash flow and is a reliable valuation metric; for capital-intensive businesses (manufacturing, infrastructure), free cash flow or EBITDA minus capex is a more accurate measure.

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