EBITDA

EBITDA starts from operating profit and adds back depreciation and amortisation, the non-cash charges that spread the cost of long-lived assets across the years they are used. The point is comparability. Two companies in the same trade can look very different because one borrowed heavily, one faces a different tax rate, or one owns newer machinery, and EBITDA takes those three differences out of the picture so the operations underneath can be compared.

It is the figure private businesses are usually priced on, quoted as a multiple of EBITDA, and the figure most loan covenants are written against. It is not a defined measure under international standards or under United States GAAP, so companies work it out in slightly different ways, and "adjusted EBITDA" can add back restructuring charges, share-based pay and one-off legal costs on top of that. Always check what a given number includes before setting it against another company's.

The mistake is treating it as cash flow. Depreciation stands in for a real cost: the cash went out when the machine was bought, and it goes out again when the machine wears out and has to be replaced. Interest has to be paid whether or not it was added back. EBITDA also ignores cash tied up in working capital, which is why a business can grow EBITDA every year and still run short of money. Free cash flow is the figure that decides whether the bills get paid, and the break-even calculator covers the fixed and variable cost split that sits underneath both.