What is EBITDA?
Updated on August 24, 2026 · by Alex
EBITDA is a company's earnings before subtracting interest, taxes, depreciation and amortization. It aims to show how much the business itself generates, leaving out how it is financed and how the wear and tear on its assets is accounted for.
The acronym describes exactly what it does: it takes operating profit and adds back four things that had been subtracted.
The idea is to isolate the performance of the operating business, so you can compare two companies in the same sector even if one is deep in debt and the other is not, or even if they pay taxes in different countries.
It is the number used most to value companies in mergers and acquisitions, and to compare capital-intensive businesses: telecom, heavy industry, infrastructure. Depreciation is enormous there and it distorts the comparison.
Treating it as if it were real money. It is not, and this is the serious criticism that has been aimed at it for decades: depreciation gets excluded as though it were not a true expense, but machines do wear out and they have to be replaced. Warren Buffett put it memorably: anyone using EBITDA is saying the wear and tear on their assets gets paid for by the tooth fairy.
A company can post excellent EBITDA and still be burning cash, because the interest on its debt and the cost of replacing its equipment eat everything it generates. That is why EBITDA should never be looked at alone: next to it has to sit free cash flow, which does subtract what the company actually has to spend to keep running.
A practical rule: when a company talks up its EBITDA a lot and its net income very little, it is worth asking why.
