Glossary · Valuation · Beginner-friendly
EBITDA
In plain English
EBITDA is a rough operating-profit number that ignores interest, taxes, and non-cash depreciation. Useful for comparisons — incomplete as a cash story.
Everyday analogy: Judging a shop by sales before rent, taxes, and equipment wear — informative, not the full picture.
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Why it matters
EBITDA is the language of lenders and deal comps — but it can hide the cash cost of staying in business.
A bit more detail (optional)
Why people use it
EBITDA tries to compare operating profit across different tax and debt setups. Lenders and M&A bankers lean on it heavily.
What it hides
Depreciation and capex still matter. A capital-hungry business can look strong on EBITDA while burning cash.
Simple examples
Capex reality check
A manufacturer shows rising EBITDA but free cash flow falls because plants need constant reinvestment. EBITDA alone looked fine; cash did not.
Capex gap
EBITDA rises while free cash flow falls because the firm must keep rebuilding plants. Operating “profit” looked strong; cash did not.
Easy mistakes to avoid
- Treating EBITDA as free cash flow
- Ignoring maintenance capex in heavy industry
- Stacking “add-backs” until EBITDA becomes fiction
Remember: Treat EBITDA as a conversation starter — confirm with free cash flow.