Definition
EBITDA means earnings before interest, taxes, depreciation and amortization. It is used to discuss operating earnings with those items excluded. It is not cash flow: capital expenditure, working capital movements, financing payments, and other cash requirements are not captured simply by naming the measure. The calculation and reporting period need to accompany the figure.
Research should distinguish EBITDA from revenue, operating profit, net income, and adjusted EBITDA. Similar sounding labels can describe materially different calculations. For an acquisition target, the figure's scope also matters: group earnings are not automatically the earnings of the business being acquired. A seller presentation is a source for the seller's claim, while financial diligence tests the calculation and the underlying records.
In origination work
An origination record should identify who supplied the number, which period it covers, which entities it includes, and whether a reconciliation is available. If public evidence supplies no figure, leave the field unanswered. Inferring EBITDA from employee count or applying an assumed margin can be a modelling exercise, but it must remain explicitly separate from an observed financial fact. Screening should preserve that distinction when deciding which questions require a direct conversation.
How the measure is built
EBITDA starts from net income and adds back interest, income taxes, depreciation and amortisation. Each add-back has a reason. Interest and taxes depend on financing and tax position, which differ between owners. Depreciation and amortisation reflect accounting for past asset purchases. Removing them is intended to show operating earnings before those effects, so businesses with different capital structures can be compared more easily.
The cost of that simplification is what is left out. Capital expenditure, the cash needed to replace trucks, equipment or buildings, does not appear. Neither do changes in working capital or the cost of leases that are treated differently under different accounting rules. For asset-heavy service businesses, the gap between EBITDA and cash available to owners can be wide, which is why lenders and buyers ask for more than a single number.
Who defines it, and why that matters
EBITDA is not a defined term under U.S. generally accepted accounting principles. For public companies, the SEC treats it as a non-GAAP measure: when used as a performance measure it should be reconciled to net income, and the staff has published interpretations about labelling and about adjustments that can make a measure misleading. Private company figures are not subject to those rules, so the same label can be computed in different ways by different sellers.
The practical rule for research is to attach the definition to the number. Record who calculated it, the period, whether it is consolidated or for one entity, and the starting point. An unlabelled "EBITDA of X" in a presentation is a claim by the presenter. The word that matters is the one before the number: reported, adjusted, pro forma, run-rate or estimated all mean different things.
How to use it in screening
In early screening EBITDA is mostly a threshold and a conversation starter. Most targets will not disclose it publicly, so the question becomes how much to infer from other evidence. Any inference should be labelled as such and kept in a separate field from disclosed figures. Multiplying an assumed margin by an estimated revenue produces a number that looks like an observation and is not.
When a figure is disclosed, ask for the bridge: net income to EBITDA, and EBITDA to any adjusted version. A short reconciliation, with the period and entity scope stated, is enough to decide whether the figure can be compared with others. If no reconciliation is offered, record the figure as unreconciled and do not compare it with reconciled ones.
Related terms
- Adjusted EBITDA — EBITDA modified by specified adjustments whose rationale and supporting records need separate review.
- Quality of earnings — Financial diligence examining the composition, support, and sustainability of a business's reported earnings.
- Lower middle market — A practitioner label for a smaller segment of established businesses whose boundaries depend on the mandate and measurement used.
Further reading
- Evidence for financial screening fields
- Lower middle market
- Evidence standards for financial claims
- Article: estimating private company revenue
- Article: headcount estimates from Form 5500
- Article: private company data providers
- Commercial company databases
Sources and further reading
- Non-GAAP Financial Measures: Compliance and Disclosure Interpretations, U.S. Securities and Exchange Commission. The staff's reading of when an adjusted measure such as adjusted EBITDA is misleading, and the reconciliation and labelling it expects.
- 17 CFR 229.10 (Regulation S-K, Item 10): General, including non-GAAP measures, Legal Information Institute, Cornell Law School. Paragraph (e) is the rule behind public-company non-GAAP presentation: reconciliation to the nearest GAAP measure and equal prominence.
- Leveraged Buyouts and Private Equity, Journal of Economic Perspectives (2009). The standard survey of how buyouts are structured and what the evidence says about their effects.
To apply these distinctions to your own acquisition criteria, discuss your research brief or inspect the demo platform.