EBITDA: what it tells you — and what it does not

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It is widely used to describe operating profitability before financing, tax and non-cash depreciation effects.

Why is EBITDA useful?

It can make operating performance easier to compare across companies with different debt levels, tax positions or depreciation profiles.

EBITDA is not cash flow

A company can report strong EBITDA while generating little cash because it may require heavy CAPEX, build inventories, finance receivables, pay high interest or face substantial taxes.

EBITDA margin

EBITDA margin = EBITDA / revenue

The trend in margin can be more informative than the absolute figure. Revenue growth accompanied by falling EBITDA margin may signal deteriorating growth quality or cost pressure.

Why is EBITDA used in valuation?

EV/EBITDA is a common transaction multiple. But the multiple is only meaningful if EBITDA is properly normalised and the comparison companies are genuinely comparable.

What is normalised EBITDA?

It adjusts for non-recurring or non-market items where justified and documented. Examples can include a one-off restructuring cost or owner compensation materially different from market levels.

What should be analysed alongside EBITDA?

Operating cash flow, CAPEX, working capital, interest burden, debt and multi-year margin trends. A serious financial diagnostic should never stop at EBITDA.