Earnings before interest, taxes, depreciation, and amortisation — a proxy for operating cash flow used widely in valuation multiples, particularly EV/EBITDA.
Deeper Explanation
Buffett has famously called EBITDA a "misleading" metric because depreciation is a real economic cost — assets do wear out and must be replaced. A business that generates $100 of EBITDA but requires $80 of annual capital expenditure to maintain its asset base has true earning power of only $20, not $100. EBITDA is most useful as a first-cut comparison across companies in capital-intensive industries where depreciation schedules vary — it strips out accounting differences to enable rough comparison. It should always be followed by a capex and free cash flow analysis to reveal the true economic earning power behind the EBITDA figure.
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