What is EBITDA?
Earnings before interest, taxes, depreciation, and amortization. Approximates operating cash flow by stripping out financing decisions, tax differences, and non-cash charges. Useful but controversial: capital-intensive businesses are flattered by EBITDA because their real maintenance capex is excluded.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. The intent is to compare operating profitability across companies with different capital structures (debt vs equity) and tax jurisdictions. The criticism, most famously from Buffett and Munger, is that depreciation and amortization represent real wear-and-tear that must eventually be replaced, excluding them from earnings analysis ('bull-tritha' in Munger's phrasing) overstates the actual cash a business generates. EBITDA is most useful for capital-light service businesses and least useful for capex-heavy industrials, telecoms, and utilities.
Where EBITDA gets used
EBITDA appears in three common contexts. (1) Leverage metrics: net-debt/EBITDA is the standard cross- industry leverage ratio. (2) Valuation multiples: EV/EBITDA is widely used in private equity and cross-border deals where tax structures differ. (3) Loan covenants: most syndicated loan agreements specify EBITDA-based maintenance covenants.
invest-like surfaces EV/EBITDA and net-debt/EBITDA on every verdict page. The framework grades use FCF-based metrics where possible (free cash flow yield, owner earnings yield) because Buffett-Munger are right that EBITDA overstates cash generation for capex-heavy businesses. FCF subtracts capex; EBITDA doesn't.
Frequently asked questions
What is EBITDA?
Earnings before interest, taxes, depreciation, and amortization. Approximates operating cash flow by excluding financing, tax, and non-cash charges.
Is EBITDA misleading?
For capex-heavy businesses, yes. Depreciation represents real maintenance capex that must eventually be replaced. Buffett-Munger call EBITDA misleading when used as a cash-flow substitute.
How does invest-like use it?
EV/EBITDA and net-debt/EBITDA are surfaced as context on every verdict page. The framework grades use FCF-based metrics where possible because FCF subtracts capex.
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