Metricsebitda

EBITDA

Also known as Earnings Before Interest Taxes Depreciation and Amortization, Adjusted EBITDA, Operating EBITDA

Mikael Andersson
Mikael Andersson
VC Analyst · Updated

EBITDA is earnings before interest, taxes, depreciation, and amortization. The SEC defines it as net income (per GAAP) adjusted to add back those four items. It is a non-GAAP measure used as a proxy for operating cash profitability and as the denominator in EV/EBITDA valuation multiples.

Formula

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Net Income
GAAP net income from the statement of operations
Interest
Interest expense, net of interest income (per SEC convention)
Taxes
Income tax expense
Depreciation
Depreciation of tangible assets
Amortization
Amortization of intangible assets

In depth

The SEC's own definition is unambiguous: "earnings" in EBITDA means net income as presented in the GAAP statement of operations, with interest, taxes, depreciation, and amortization added back. Calculating from operating income is a common error, since operating income already excludes interest and taxes but does not strip out D&A in every case. Per SEC C&DIs, EBIT and EBITDA must reconcile to net income, not to operating income.

The Munger critique points at the real issue. Depreciation is not a fiction. It is the spread of past capex over its useful life. For a software company with $5M of annual capex on a $500M revenue base, adding back depreciation gets you close to free cash flow. For a data-center operator with $200M of annual capex on the same revenue, the same add-back produces a metric that hides the cash drain.

Adjusted EBITDA is where companies and SEC enforcement collide. Stock-based compensation add-backs are routine but controversial; SBC is non-cash but it is a real economic cost of running the business. Many late-stage SaaS companies show large Adjusted EBITDA and small or negative GAAP EBITDA because SBC is the gap. LPs and analysts have to decide which one to feed into a valuation multiple.

Why it matters

EBITDA is the most-quoted profitability metric in M&A, LBO, and growth-equity deal flow. EV/EBITDA is the standard multiple for mature businesses. Lenders covenant on it. Carve-out valuations get expressed in EBITDA multiples. For venture, EBITDA matters once a portfolio company gets close to profitability and the next round's price starts to anchor on EV/EBITDA instead of EV/Revenue.

Worked example

A SaaS company's reported financials:

Line itemValue
Revenue$100M
Cost of revenue-$25M
Sales and marketing-$40M
Research and development-$25M
General and administrative-$10M
Operating income (EBIT)$0M
Depreciation$3M
Amortization$2M
Interest expense, net-$1M
Income tax-$1M
Net income-$2M
Stock-based comp$15M
EBITDA          = Net Income + Interest + Taxes + D + A
                = -$2M + $1M + $1M + $3M + $2M
                = $5M
Adjusted EBITDA = EBITDA + SBC
                = $5M + $15M
                = $20M

The company reports an EBITDA margin of 5% and an Adjusted EBITDA margin of 20%. Public software comps at 20x EV/EBITDA against the unadjusted number imply a $100M EV; against the adjusted number, $400M. The choice of which EBITDA to trust is the entire valuation argument.

Frequently asked

Is EBITDA a GAAP number?

No. The SEC's Non-GAAP Financial Measures guidance classifies EBITDA as a non-GAAP measure. When companies report it in SEC filings, they must reconcile to GAAP net income, give the GAAP measure equal or greater prominence (Regulation S-K Item 10(e)), and cannot present it on a per-share basis.

What's the difference between EBITDA and Adjusted EBITDA?

EBITDA strictly adds back interest, taxes, depreciation, and amortization. Adjusted EBITDA layers further add-backs like stock-based compensation, one-time legal settlements, or restructuring charges. The SEC permits the term 'Adjusted EBITDA' but requires labeling that distinguishes it from EBITDA, and every add-back must be disclosed and justified.

Why do investors use EBITDA instead of net income?

EBITDA strips out the effects of capital structure (interest), tax jurisdiction (taxes), and accounting choices on long-lived assets (depreciation, amortization). That makes it more comparable across companies and the cleanest denominator for EV multiples. CFA Institute frames it as the operating cash-proxy that feeds EV/EBITDA in cross-company comps.

When is EBITDA a poor metric?

For capital-intensive businesses where depreciation reflects real cash outflows (data centers, hardware, biotech facilities), EBITDA overstates true profitability. Charlie Munger's critique applies: 'every time you see EBITDA, replace it with bullshit earnings.' For software with low capex, EBITDA tracks cash earnings closely. For hardware or infrastructure, EBIT or free cash flow is a better measure.

Sources & further reading