EBITDA, and the Argument About It
Earnings before interest, taxes, depreciation and amortization is the most used and most criticised measure in finance. Both the use and the criticism are reasonable.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- EBITDA strips out financing, tax and non-cash asset charges to compare operations directly.
- It is not a GAAP measure and there is no single authoritative definition of it.
- Adding back depreciation treats capital intensity as free, which for some businesses it is not.
- It is most defensible where capital spending is low and least where assets wear out.
- Adjusted EBITDA goes further, and every add-back is the company's own judgement.
MAD Academy Training Video · 0:45
Profit Before the Inconvenient Parts
EBITDA removes interest, tax, depreciation and amortisation — and whether that is useful depends entirely on the business.
This lesson is part of a Stock Alerts + Tools plan.
What it is doing
EBITDA = operating income + depreciation + amortization
- equivalently: net income plus interest, tax, depreciation and amortization
The intent is to isolate operating performance from three things that differ between otherwise comparable companies: how they are financed, where they are taxed, and how aggressively they depreciate assets bought in the past.
All three are real differences that have nothing to do with which company runs a better operation today, which is why the measure exists and why it is used so widely in acquisition and credit analysis.
The legitimate use
Comparing two competitors where one carries heavy debt and one carries none, net income is dominated by interest expense that has nothing to do with operational quality. EBITDA removes that difference.
It is also the denominator in the standard leverage measure. Net debt to EBITDA is how credit markets size a borrower, and covenants are written against it, so it is not merely an analytical convenience: it is a number with legal consequences in loan agreements.
The criticism
Depreciation is a non-cash charge in the period it appears, but it represents cash that was spent and, for most businesses, cash that will be spent again. Machines wear out. Adding depreciation back treats that renewal as free.
The sharpest version of the criticism asks where management thinks capital expenditure comes from if not out of earnings. It is a fair question for a manufacturer, a telecom operator or an airline; it is much less pointed for a software business whose capital spending is genuinely small.
| Business type | Capex / revenue | Is EBITDA a fair proxy? |
|---|---|---|
| Enterprise software | Low | Reasonably; little is being added back |
| Consumer brands | Moderate | Partly |
| Telecom and utilities | High | Poorly; depreciation is a genuine recurring cost |
| Airlines and heavy industry | Very high | Poorly, for the same reason |
Scroll the chart sideways to see all of it.
Adjusted EBITDA
Adjusted EBITDA goes further and removes items management considers non-representative: restructuring, stock-based compensation, impairments, acquisition costs. Every one of those add-backs is a judgement made by the company being measured.
The reconciliation to GAAP is required disclosure, so the add-backs can be read individually rather than accepted in aggregate. That reconciliation is where the analysis actually happens, and it is a table rather than a paragraph.
The single most consequential add-back is stock-based compensation, because it is genuinely non-cash and genuinely a cost. A company whose adjusted EBITDA is positive only because it excluded the equity it paid its employees has told you something the headline did not.
Where the measure came from
EBITDA was not invented as a measure of profit. It came into use in leveraged buyouts in the 1980s, as an estimate of the cash available to service debt: a lender wanted to know what the business generated before the cost of the financing it was about to take on, and before the tax consequences that financing would change.
For that purpose it is the right measure. Interest is excluded because the whole question is how much interest can be supported. Tax is excluded because it changes with the capital structure. Depreciation is excluded because it reflects capital spent before the buyer arrived.
Every criticism of EBITDA is a criticism of using it outside that context. As a measure of cash available for debt service in a transaction it is defensible; as a description of how profitable a business is it excludes the cost of the assets the business runs on, which for anything asset-heavy is most of the answer.
This also explains why it is standard in some sectors and absent in others. It remains the convention in leveraged finance, cable, telecoms and infrastructure, where the capital structure is the variable of interest, and it is rarely quoted for banks or for asset-light software companies where it approximates operating income anyway.
What it hides in an asset-heavy business
Depreciation is an estimate, non-cash, and frequently criticised on both counts. It is also a stand-in for something entirely real: assets wear out and have to be replaced, and the replacement is a cash outflow that arrives on a different schedule from the accounting charge.
In a business that owns trucks, plant, ships or networks, the annual cost of maintaining the asset base is a genuine cost of operating. Excluding it produces a profit figure describing a company that never replaces anything, which is accurate for exactly as long as the existing assets last.
| Business type | Depreciation as a share of EBITDA | How much EBITDA overstates |
|---|---|---|
| Enterprise software | Small | Very little |
| Consumer brands | Moderate | Somewhat |
| Manufacturing | Large | Materially |
| Telecom and cable | Very large | Enough to change the conclusion |
| Shipping and airlines | Very large, and lumpy | Enough that the measure is close to meaningless alone |
A practical cross-check is to compare depreciation against capital expenditure over several years. If capital spending consistently matches or exceeds depreciation, the charge is describing a real and continuing outflow rather than an accounting artefact.