What Is EBITDA?

EBITDA is calculated as: Net Income + Interest Expense + Taxes + Depreciation + Amortization. It approximates the cash earnings generated by a business's core operations. Investors and analysts use EBITDA for business valuation (applying an industry multiple — e.g., 6× EBITDA), comparing profitability across companies with different capital structures or tax situations, and assessing debt capacity. In M&A, deal prices are often quoted as a multiple of EBITDA (e.g., 'we sold for 8× EBITDA'). Adjusted EBITDA adds back one-time or non-recurring items to give an even cleaner view of ongoing earnings power. EBITDA has critics: it ignores capital expenditure requirements, can be manipulated by add-backs, and was famously criticized by Warren Buffett as a misleading metric when depreciation is economically real.

Understanding EBITDA is essential for anyone involved in buying, selling, or financing a business. If you are preparing to sell your company, your advisors will likely present your business using an EBITDA multiple. A financial advisor or M&A consultant can help you understand your EBITDA, identify add-backs that improve the number legitimately, and model what a sale or investment looks like at various multiples.