What Is EBITDA? Earnings Before Interest, Tax & D&A

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a company’s operating profit with four specific expenses added back, meant to approximate the cash-generating power of the core business before decisions about debt, tax jurisdiction, and accounting for past capital spending get layered on top. It’s one of the most-quoted numbers in corporate finance — and one of the most argued about.

The formula

Starting from net income, EBITDA adds back four line items:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

You can also build it from operating income (EBIT) rather than net income, since EBIT already excludes interest and taxes:

EBITDA = Operating Income (EBIT) + Depreciation + Amortization

Both routes land on the same number. Depreciation spreads the cost of physical assets — equipment, buildings, vehicles — over their useful life; amortization does the same for intangible assets like patents or acquired software. Neither is a cash outflow in the period it’s recorded; the cash left the business back when the asset was purchased. Adding them back is meant to show earnings before that non-cash accounting allocation.

Why investors reach for it

EBITDA exists to make companies comparable despite differences that have nothing to do with how well the underlying business operates:

• Capital structure. One company might be funded mostly with debt, another mostly with equity. Interest expense reflects financing choices, not operating performance — stripping it out lets you compare two businesses on operations alone.
• Tax jurisdiction. Two companies with identical operations but different tax rates (different countries, different structures) will show different net income. EBITDA removes that variable.
• Capital intensity and asset age. Depreciation schedules depend on accounting choices and how old a company’s asset base is, not necessarily how the business is performing today. A company that bought factories a decade ago and one that just built the same factories will show very different depreciation, even with identical current operations.

That makes EBITDA popular for cross-company comparisons, and it’s the denominator in one of the most common valuation shortcuts: the EV/EBITDA multiple, which divides enterprise value by EBITDA to gauge how expensive a company is relative to its operating profit, independent of how much debt or cash sits on its balance sheet. It’s also central to private equity and leveraged buyout analysis, where a target’s EBITDA is used to estimate how much debt the deal can support.

EBITDA vs net income vs free cash flow

	Net income	EBITDA	Free cash flow
Includes interest expense	Yes	No	Yes (via cash from operations)
Includes taxes	Yes	No	Yes
Includes depreciation/amortization	Yes	No	Excluded via add-back, but capex is deducted
Includes capital expenditures	Indirectly, over time	No	Yes, deducted directly
What it approximates	Bottom-line accounting profit	Core operating profitability	Actual cash generated after reinvestment
Easiest to compare across companies	No	Yes	Moderate

Free cash flow is the useful contrast: EBITDA adds depreciation and amortization back but doesn’t subtract the capital expenditures those charges are meant to represent. Free cash flow does the opposite — it starts from operating cash and subtracts actual capex. For a capital-light software company the two numbers can be fairly close; for a capital-intensive business like a telecom or a chipmaker building fabs, EBITDA can look healthy while free cash flow is thin or negative, because heavy ongoing capex simply doesn’t show up in EBITDA at all.

The core criticism

EBITDA’s biggest critic is arguably Warren Buffett, who has repeatedly pointed out that depreciation is not an optional expense to ignore — it’s a real cost of doing business, deferred to the accounting period that matches when the asset wears out. A company still has to replace its trucks, machines, and servers eventually, and that spending is cash out the door whether or not it shows up as “depreciation” on the income statement. Treating EBITDA as a stand-in for cash profit can flatter a business that’s quietly under-investing in the assets it depends on.

EBITDA also excludes changes in working capital — money tied up in receivables and inventory — which can mean a company can show strong EBITDA while actually burning cash if it’s struggling to collect payment or is over-stocked. And because it’s not defined by formal accounting standards the way net income is, companies have latitude in how they calculate “adjusted EBITDA,” sometimes adding back items — stock-based compensation, restructuring costs, one-time charges — that stretch the definition of what’s genuinely non-recurring.

How to use it without being misled by it

EBITDA is a reasonable starting point for comparing operating performance across companies with different debt loads or tax situations, and it’s a legitimate input into valuation multiples like EV/EBITDA. The mistake is treating it as a proxy for cash profit or ignoring the difference between EBITDA and net income entirely.

A few habits keep it honest: check whether depreciation is a small or large share of the add-back — a large one signals a capital-intensive business where ignoring reinvestment needs matters more. Compare EBITDA to free cash flow rather than substituting one for the other. And when a company reports “adjusted EBITDA” rather than a plain EBITDA figure, look at what’s been added back — one-off items are fine, but recurring costs dressed up as one-off items are a common way to make a struggling business look healthier than it is.

The takeaway

EBITDA — earnings before interest, taxes, depreciation, and amortization — strips out financing, tax, and non-cash accounting decisions to leave a rough measure of core operating profit, which makes it useful for comparing companies with different capital structures or tax situations. It’s not a substitute for net income or free cash flow: it ignores real reinvestment needs, working-capital swings, and the actual cash cost of replacing worn-out assets. Use it as one input among several, and always sanity-check it against free cash flow before treating a strong EBITDA figure as proof of a strong business.