EBITDA

EBITDA is calculated by taking net income and adding back interest, taxes, depreciation, and amortization. Because depreciation and amortization are non-cash accounting charges, removing them from the profit calculation gives a figure that more closely approximates the actual cash earnings of the business. This is why EBITDA is often used as a proxy for operating cash flow, particularly in industries with large capital expenditures or significant intangible assets being amortized.

EBITDA is one of the most referenced metrics in business valuation and M&A transactions. Acquirers and investors commonly use EBITDA multiples to benchmark a company's value against industry peers, making it a critical number in deal negotiations. However, it has its critics too. Warren Buffett has famously questioned the metric for excluding depreciation, which represents real economic costs of asset usage. EBITDA also does not account for working capital requirements or capital expenditure needs, meaning a company with strong EBITDA can still have poor free cash flow. It is best used as one input among several rather than as a standalone measure of financial health.