EBITDA Explained: What Every Investor Should Know

There’s a word that shows up everywhere in financial reports, analyst calls, and earnings presentations: EBITDA.

For many investors it’s the starting point to judge whether a company actually generates money—or just “profits on paper”. And yet it remains one of the most misunderstood metrics: some treat it as a synonym for profit; others call it a “massaged” number meant to hide reality.

In this article I’ll explain what EBITDA is, how it’s calculated, what it truly reveals about a company’s health, and how a disciplined investor should interpret it.

What EBITDA means

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

In plain terms, it measures a company’s operating performance before financial structure, taxes, and non-cash accounting charges distort the picture.

Put simply: EBITDA shows what the business earns from its core activity, without considering how it’s financed or accounting expenses that don’t imply an immediate cash outflow.

The logic behind EBITDA

Imagine two companies in the same industry:

• One is financed mainly with debt; the other with equity.
• They face different tax situations.
• Their assets have different ages (and therefore different depreciation).

If you look only at net income, comparing their real operating performance becomes harder, because financing and accounting effects “dirty” the comparison.

EBITDA tries to isolate operations: what the business generates from running the business, regardless of how it’s financed.

How to calculate EBITDA

If you have the income statement, EBITDA is relatively straightforward. Common equivalent approaches include:

1) From net income

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

2) From operating profit (EBIT)

EBITDA = EBIT + Depreciation + Amortization

Sometimes you’ll also see it as:

EBITDA = Operating revenue − Operating expenses (excluding D&A)

The idea is always the same: approximate “pure” operating profitability.

Why investors like EBITDA

EBITDA became a standard because it:

• Improves comparability across companies. Less distortion from taxes and financing.
• Highlights operational efficiency. What the business generates before financing and accounting effects.
• Offers a rough proxy for cash potential. It’s not cash flow, but it’s a clue.
• Supports valuation. Multiples like EV/EBITDA are common in M&A.

In short: it’s a fast way to estimate operating profitability while keeping comparisons meaningful.

What EBITDA reveals (and what it hides)

EBITDA is useful—but limited. Understanding what it includes and excludes is essential.

What it shows

• Efficiency of the core business.
• Ability to generate operating earnings.
• Cash-generation potential before taxes and financing.

What it hides

• The real cost of maintaining or renewing assets (capex).
• Debt interest (critical for leveraged companies).
• Taxes (inevitable).
• Working capital needs (inventory, receivables, payables).

In other words: EBITDA shows the muscle, not the wear and tear. It’s like judging a car’s performance without considering fuel and maintenance.

Practical example: same EBITDA, different reality

Imagine two restaurants with an EBITDA of €100,000. At first glance, they look equally profitable.

But one must constantly renew equipment (€30,000 per year), while the other has minimal maintenance. Once you account for that reinvestment, the economic reality is very different.

That’s why serious investors pair EBITDA with cash-flow and reinvestment metrics. Context matters as much as the number.

EBITDA vs EBIT vs net income

They’re often confused, but they answer different questions:

Metric	Meaning	What it measures	Best use
EBITDA	Earnings before interest, taxes, depreciation & amortization	“Pure” operating profitability	Comparing operational efficiency
EBIT	Earnings before interest & taxes	Profit after depreciation & amortization	Understanding asset intensity
Net income	Final result after all expenses & taxes	Accounting profit for shareholders	Full bottom-line outcome

Why some investors distrust EBITDA

EBITDA has critics—Warren Buffett among them—because it can be misleading when used without context.

The point is simple: if someone talks about EBITDA without talking about asset reinvestment, you may be hearing an incomplete story.

A company can show high EBITDA, but if it must reinvest heavily in machinery or technology, real cash generation can be far lower.

EBITDA doesn’t replace cash-flow analysis—it complements it.

EV/EBITDA: a valuation tool

A common use is the EV/EBITDA multiple, comparing a company’s total value to its operating earnings capacity.

• EV (Enterprise Value) ≈ market cap + net debt − cash
• EV/EBITDA shows how many “times EBITDA” the market is paying

Example:

If EV is €10 million and EBITDA is €2 million:

EV/EBITDA = 10 / 2 = 5x

Low multiples can signal opportunity or risk. High multiples can reflect growth expectations (or over-optimism). Always compare within the same sector.

How an investor reads EBITDA

A disciplined investor doesn’t treat EBITDA as a standalone number. They evaluate three angles:

Trend

The direction matters more than today’s value: is it growing, flat, or declining?

EBITDA margin

EBITDA margin = (EBITDA / Revenue) × 100

Useful for comparing operational efficiency in the same industry.

EBITDA quality

This is where serious analysis lives:

• Is EBITDA supported by recurring revenue or one-offs?
• Are “non-recurring” add-backs happening every year?
• How does operating cash flow (CFO) behave relative to EBITDA?

Common mistakes with EBITDA

• Treating it as cash flow.
• Ignoring sector context.
• Over-adjusting (or not adjusting) one-offs.
• Ignoring debt: high EBITDA doesn’t help if interest crushes the business.
• Confusing growth with quality.

Adjusted EBITDA

Many companies present Adjusted EBITDA, excluding items like:

• Severance or litigation costs.
• Restructuring expenses.
• Exceptional investments.
• FX impacts.

It can help “clean” an unusual year, but be careful: too many adjustments, year after year, can be a red flag.

EBITDA for SMEs: still useful

EBITDA isn’t just for big corporations. For SMEs it can be practical:

• A repair shop can see whether operations are profitable before debt and taxes.
• A training business can evaluate core profitability without financing noise.

In selling, investing, or valuing a business, EBITDA is often a reference metric.

Powerful—but not infallible

EBITDA is valuable for understanding operating performance, but only when used with judgment and complemented with other metrics.

Used well, it helps you:

• Compare companies more fairly.
• Spot real operational improvements.
• Support valuation with a clearer base.

Used poorly, it becomes an accounting illusion.

A smart investor always asks:

• What’s behind this EBITDA?
• How much real cash does it generate?
• What risks are taken to produce it?

In investing, clarity beats enthusiasm.