EBITDA

Key takeaways

EBITDA = Net Income + Interest + Taxes + D&A. Or equivalently, EBIT + D&A.
It's a proxy for operating cash flow — useful when comparing companies with different capital structures, tax regimes, or asset bases.
Beware "Adjusted EBITDA". Many companies add back stock-based compensation, restructuring charges, and one-time items. Read the bridge.
EBITDA is not free cash flow. It ignores capex, working capital, and cash taxes — all of which can be material.
Used as the denominator in PE leverage ratios (Debt/EBITDA), interest coverage (EBITDA/Interest), and the standard valuation multiple (EV/EBITDA).

Why EBITDA exists

Net income is contaminated by decisions that don't reflect operating performance. A leveraged company carries higher interest expense than an unlevered peer, lowering net income — but the underlying business may be just as good. A company in a high-tax jurisdiction reports lower net income than the same business in a tax haven. A capital-heavy business has higher D&A than an asset-light peer, even if their cash generation is similar.

EBITDA strips all four: interest (financing), taxes (jurisdiction), depreciation and amortisation (the past asset base). What's left is a number that's roughly comparable across companies regardless of capital structure, tax position, or asset intensity.

This made EBITDA the lingua franca of comparison — for M&A multiples, lender covenants, peer benchmarking. The price: EBITDA also strips out things that are real economic costs (capex to maintain the asset base, working capital invested in growth, cash taxes actually paid). So EBITDA is useful but incomplete.

How to calculate it

Two equivalent paths:

EBITDA = Net Income + Interest + Taxes + D&A
EBITDA = EBIT + D&A
EBITDA = Revenue − COGS − OpEx (excluding D&A)

All three give the same answer when computed consistently. The "build down from net income" approach is most common in modelling because it's easy to verify against reported financials.

Worked example

A manufacturer reports: Revenue $1,000M, COGS $600M, OpEx (incl D&A $80M) $200M, Interest $30M, Taxes $42M, Net Income $128M.

Path	Calculation	Result
Build-up	$128 + $30 + $42 + $80	$280M
Build-down	$1,000 − $600 − ($200 − $80)	$280M
From EBIT	$200 (EBIT) + $80 (D&A)	$280M

EBITDA margin = $280M / $1,000M = 28%. For context: industrial / manufacturing businesses typically run 15–25% EBITDA margins; software runs 30%+.

Adjusted EBITDA — read the bridge

Many companies report "Adjusted EBITDA" in their earnings releases. Adjustments commonly include:

Stock-based compensation add-back
Restructuring and severance charges
Impairment charges
One-time legal settlements
Acquisition-related expenses
Pre-revenue integration costs

Some are legitimate (a true one-time charge that distorts current-period economics). Many are aggressive (stock-based compensation is recurring, not one-time, and is a real economic cost). Always read the company's bridge from GAAP net income to Adjusted EBITDA before quoting the headline number.

Charlie Munger's line: "I think you would understand any presentation using the word EBITDA if every time you saw that word you just substituted the phrase 'bullshit earnings.'" The advice isn't to ignore EBITDA — it's to understand what's been added back and decide whether you agree.

Where EBITDA shows up

Valuation multiples

EV/EBITDA is the most common multiple in M&A and PE. Typical ranges:

Mature industrial: 6–10×
Consumer / branded: 10–15×
Software / SaaS: 15–30× (sometimes 50×+ for high growth)
Cyclicals at top: 5–8× (multiple compresses near peak)

See EV/EBITDA for the full breakdown.

Leverage ratios (covenants)

Debt / EBITDA — total leverage. Investment grade typically < 3×; high yield 4–6×; LBO <= 6× initially, dropping to 4× by year 4.
Net Debt / EBITDA — same metric netting cash. More common for cash-rich companies.
EBITDA / Interest Expense — interest coverage. Investment grade typically > 5×; covenant trigger usually > 2×.

Common EBITDA mistakes

Treating EBITDA as cash flow. EBITDA ignores capex, working capital, and cash taxes. A company with EBITDA of $100M and capex of $80M generates only $20M of pre-tax cash — calling EBITDA "cash flow" is misleading.
Ignoring stock-based compensation. SBC is non-cash but it's not free — shareholders are diluted. For tech companies, SBC can be 5–15% of revenue. Adjusted EBITDA that adds back SBC overstates economic profit.
Comparing EBITDA across asset-intensity levels. A capital-light business and a capital-heavy business with the same EBITDA generate very different free cash flows because capex differs. Use EV/EBITDA-CapEx or EV/FCF for cross-industry comparisons.
Computing EBITDA margins on segment revenue but consolidated D&A. Segment-level analysis requires segment-level D&A, which most companies don't disclose.
Forgetting D&A buried in COGS. Some companies report D&A as a separate OpEx line; others bury it in COGS. Adding back only the OpEx D&A understates EBITDA.

How Smalt AI builds it

Smalt AI's three-statement and DCF models compute EBITDA as a derived line, with the bridge from revenue all the way down to net income visible. When pulling EBITDA from filings, the model checks whether the reported figure includes all D&A (including any buried in COGS) and reconciles to the cash flow statement. Adjusted EBITDA is broken out with each adjustment line item visible — so you can choose which adjustments you accept and which you reverse.