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EBITDA: Useful and Abused

intermediate7 min read

A popular profit shortcut that hides real costs. When to trust it and when it lies.

EBITDAEarnings before interest, tax, depreciation, amortisation. = Earnings Before Interest, Tax, Depreciation and AmortisationPaying off a loan through scheduled EMIs over time.. It’s operating profitEarnings before interest, tax, depreciation, amortisation. with depreciation and amortisationPaying off a loan through scheduled EMIs over time. (non-cash costs) added back — a rough proxy for cash the operations generate.

It’s useful for comparing companies regardless of their debt and tax situations, and for capital-heavy businesses where depreciation is large. But it has a dark side.

EBITDAEarnings before interest, tax, depreciation, amortisation. conveniently ignores three things companies actually have to pay: interest, taxes, and the cost of wearing out their assets (depreciation). Charlie Munger called it “bulls**t earnings.” A company drowning in debt and capex can show healthy EBITDAEarnings before interest, tax, depreciation, amortisation. while bleeding real cash. Always sanity-check EBITDA against actual free cash flowCash left after running and reinvesting in the business. and net profit.
Common mistakeValuing a heavily-indebted, capital-hungry company on EBITDAEarnings before interest, tax, depreciation, amortisation. alone. Those add-backs (interest, depreciation) are real obligations — ignoring them flatters a fragile business.
Key takeawayEBITDAEarnings before interest, tax, depreciation, amortisation. approximates operating cash generation and aids comparison, but it hides interest, tax and asset-replacement costs — never trust it in isolation.
FAQs
EBITDA vs net profit — which should I use?

Use both. EBITDA helps compare core operations across companies; net profit (and free cash flow) tells you what actually reaches owners after all real costs. Beware companies that only ever highlight EBITDA — they may be hiding heavy interest or depreciation.