EBITDA

EBITDA is an adjusted profit figure that shows how profitable a company's core business is – without distortions from taxes, interest and depreciation.

What is excluded and why:

• Interest: depends on the financing structure, not the business
• Taxes: vary by country and tax strategy
• Depreciation (on tangible assets): an accounting figure, not a real cash flow
• Amortisation (on intangible assets): likewise an accounting figure

What is EBITDA used for?

• Comparing companies: the EBITDA margin (EBITDA ÷ revenue) compares profitability regardless of tax location and financing
• Valuing companies: EV/EBITDA (enterprise value ÷ EBITDA) is one of the most important valuation ratios in takeovers
• Loan negotiations: banks use EBITDA to assess creditworthiness

Criticism: Warren Buffett hates EBITDA: "Does management think the tooth fairy pays for capital expenditures?" EBITDA ignores real costs – machines HAVE to be replaced.