--- title: "EBITDA: The Most Useful and Most Abused Number in Finance" description: "Companies and analysts lean on EBITDA every earnings season to gauge operating performance. It's everywhere — and Charlie Munger called it 'horror squared.' Here's what it is, why it's used, and why serious investors distrust it." category: "Companies" category_url: https://boursel.com/category/companies author: "Hannah Blackwood" published: 2026-06-26T17:42:00.000Z updated: 2026-06-26T17:42:00.000Z canonical: https://boursel.com/article/ebitda-the-most-useful-and-most-abused-number-in-finance tags: ["ebitda", "accounting", "valuation", "earnings", "companies"] --- # EBITDA: The Most Useful and Most Abused Number in Finance Companies and analysts lean on EBITDA every earnings season to gauge operating performance. It's everywhere — and Charlie Munger called it 'horror squared.' Here's what it is, why it's used, and why serious investors distrust it. *This is general information, not investment advice.* You'll see "EBITDA" in nearly every earnings release. It's worth knowing what it reveals — and what it hides. ## What it stands for **EBITDA** = **E**arnings **B**efore **I**nterest, **T**axes, **D**epreciation, and **A**mortization. In plain terms: what a company earns from its core operations before the effects of how it's financed, where it's taxed, and how accountants spread asset costs over time. The [Corporate Finance Institute](https://corporatefinanceinstitute.com/resources/accounting/what-is-ebitda/) describes it as a gauge of "core profitability from operations." ## How it's calculated Two routes to the same number: start from **net income** and add back interest, taxes, depreciation and amortization; or take **operating income** and add back depreciation and amortization. The idea is to isolate the cash-generating engine before financing and accounting choices. ## What each add-back removes - **Interest** — the cost of debt; stripping it out compares firms as if they had the same capital structure. - **Taxes** — vary by country and circumstance; removing them aids cross-border comparison. - **Depreciation** — an accounting charge that spreads the cost of a physical asset (a factory, trucks) over its life. No cash leaves the door in the year it's booked, but it reduces reported profit. - **Amortization** — the same idea for **intangible** assets (patents, brands, acquired customer relationships). ## Why it's used EBITDA lets you compare the operating performance of companies with very different debt loads, tax situations and capital-spending histories. It anchors a common valuation shorthand — the **EV/EBITDA multiple** (enterprise value ÷ EBITDA) — used in M&A and public markets because it's capital-structure neutral. It also appears in **debt covenants**: lenders often cap a borrower's net-debt-to-EBITDA ratio, so treasurers watch it closely. ## The criticism — and it's serious Warren Buffett and Charlie Munger have argued for decades that EBITDA misleads. The add-backs, they note, are **real costs**, not free passes. Depreciation is the prime target: a factory or fleet wears out and must eventually be **replaced with real cash** — Buffett, in a Berkshire shareholder letter, asked whether managers think "the tooth fairy pays for capital expenditures." Munger was blunter, calling EBITDA "bullshit earnings" and "**horror squared**" — the second horror being that business schools taught it after, in his telling, investment bankers invented it to make deals look better, [as widely reported](https://www.wallstreetprep.com/knowledge/warren-buffett-ebitda/). A second issue is **adjusted EBITDA**, which isn't defined by accounting standards (GAAP) and has no fixed formula. Companies can add back stock-based pay, "restructuring" charges (that somehow recur yearly), litigation costs and more — making a struggling business look operationally sound. Because it's non-GAAP, the burden falls on the reader to reconstruct reality. ## EBITDA vs. free cash flow vs. net income **Net income** is the GAAP bottom line after everything. **Free cash flow** subtracts capital spending from operating cash flow — the cash a business actually throws off after maintaining its assets, which Buffett considers the more honest measure. **EBITDA** sits between: more comparable across companies than net income, but less honest about cash than free cash flow. The gap between EBITDA and free cash flow is widest in exactly the capital-heavy industries — airlines, telecoms, energy, chip fabs — where EBITDA is most quoted. ## Where it works, and where it fails EBITDA is most useful comparing similarly-financed businesses or for a quick cross-border valuation screen. It's most **dangerous** for capital-intensive companies whose assets genuinely wear out, and for heavily indebted firms where interest is a dominant, real cost. There, ignoring depreciation and interest isn't simplification — it's misrepresentation. ## What to watch in an earnings report When a company touts EBITDA — especially *adjusted* EBITDA — ask: what exactly was added back, and is it truly one-off? How big is the gap between EBITDA and free cash flow? And how much debt is there, so that ignoring interest flatters the picture? EBITDA is a useful first screen. It is a poor final answer. ## Sources - [What is EBITDA?](https://corporatefinanceinstitute.com/resources/accounting/what-is-ebitda/) - [Warren Buffett on EBITDA](https://www.wallstreetprep.com/knowledge/warren-buffett-ebitda/)