What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
It is a metric used to evaluate a company's operating performance. It attempts to strip away the "accounting noise" (tax environments, financing methods, and asset costs) to show the raw profitability of the business's core operations.
The Formula
Net Income + Interest + Taxes + Depreciation + Amortization = EBITDA
Why Investors Use It EBITDA allows investors to compare companies in different countries or industries on an apples-to-apples basis.
- Neutralizes Tax: Ignores the fact that a UK company pays different tax than a US company.
- Neutralizes Debt: Ignores whether the company was funded by debt (loans) or equity.
Why it is controversial Legendary investor Charlie Munger famously called EBITDA "bullshit earnings." Why? Because it ignores Depreciation and Capital Ependiture (CapEx). If you run a heavy manufacturing business (or a server-heavy cloud company), your equipment wears out and needs replacing. EBITDA pretends that this cost doesn't exist.
The Startup Context For early-stage tech startups, EBITDA is often irrelevant because the number is usually negative (you are burning cash to grow). However, if you are looking to exit to a Private Equity (PE) firm later in your journey, EBITDA becomes the golden number. PE firms buy mature software companies based on multiples of EBITDA (e.g., "15x EBITDA").
Key Takeaway: EBITDA is a proxy for cash flow, but it is not cash flow. It is useful for valuing mature businesses, but often meaningless for high-growth, loss-making startups.
