EBITDA

EBITDA is calculated starting from either revenue or net income: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Alternatively: EBITDA = Operating Income (EBIT) + Depreciation + Amortization. Some analysts calculate Adjusted EBITDA, which further removes stock-based compensation, restructuring charges, and other non-recurring items.

The EV/EBITDA multiple is calculated as: EV/EBITDA = Enterprise Value / EBITDA. Enterprise value equals market cap plus total debt minus cash. This ratio is preferred over P/E for comparing companies with different debt levels because enterprise value accounts for the entire capital structure, and EBITDA is pre-interest, making the numerator and denominator consistent.

EBITDA margin (EBITDA / Revenue) shows what percentage of revenue converts to EBITDA. This is useful for comparing operating efficiency between companies in the same industry, controlling for differences in capital intensity and financial structure.

EBITDA is one of the most important metrics in corporate finance for several reasons. In M&A, buyers often price acquisitions as a multiple of EBITDA. In credit analysis, lenders evaluate a company's ability to service debt using the debt-to-EBITDA ratio. In equity analysis, EV/EBITDA is a standard valuation tool.

However, EBITDA has notable critics, including Warren Buffett, who has argued that depreciation is a real cost of doing business that should not be ignored. Capital-intensive companies must continually reinvest in equipment and infrastructure, and EBITDA overstates their true cash generation by adding back these costs. Free cash flow is often considered a more accurate measure of cash profitability.