EBITDA Explained: What It Is (and What It Ignores)

EBITDA explained: what it measures, why investors use it, and the biggest pitfalls—especially for capital-intensive businesses.

What is EBITDA?

EBITDA is earnings before interest, taxes, depreciation, and amortization. It is a proxy for operating earnings, but it is not cash flow.

Key limitation

  • Ignores capital expenditures
  • Ignores working capital needs
  • Can overstate “cash-like” earnings for capital-intensive firms

Use EBITDA with EV and cash flow

Understand EV/EBITDA and cross-check with free cash flow.

EV/EBITDA methodFree cash flowCapex vs Opex

FAQs

Is EBITDA “fake”?▼

Not necessarily, but it can be abused. Investors use it carefully and always cross-check with cash flow.

Why do investors like EV/EBITDA?▼

It helps compare businesses with different capital structures, but you must consider capex and cash flow.

Related

Enterprise valueRelative valuation

Intrinsic Investor is for education and research only. Not financial advice.