EBITDA

EBITDA strips out financing, tax, and the accounting charge for long-lived assets so that operating performance can be compared across firms. Lenders and buyers use it because it sits above the claims of both debt and equity.

It became popular in leveraged buyouts, where the question was how much cash the assets might throw off before maintenance spending.

Rising EBITDA with flat sales means margins improved. Rising EBITDA that is all from an acquisition is size, not better operations. Always pair the rupee figure with the margin.

EBITDA ignores the cash that must be reinvested to keep the assets productive. A business can show healthy EBITDA and still have no free cash flow. Warren Buffett has pointed out that depreciation is often a real cost, not an optional add-back.