EBITDA and the bridge to free cash flow

EBITDA is the number bankers reach for first, and beginners misread it constantly. Here's the honest version: EBITDA is a rough proxy for the operating cash profit a business makes before you account for how it's financed, how it's taxed, and how its accountants book non-cash items. It is useful. It is also not free cash flow, and confusing the two will cost you in a Superday.

What EBITDA is, and why bankers use it

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Start from EBIT (operating income) and add back D&A:

$\text{EBITDA} = \text{EBIT} + \text{D\&A}$

Or build it up from the bottom of the income statement:

$\text{EBITDA} = \text{Net Income} + \text{Interest} + \text{Taxes} + \text{D\&A}$

Both roads land in the same place. Each add-back is deliberate, and knowing why each one comes back is the whole point:

The reason bankers like EBITDA is comparability. Two companies can run identical operations, but one is loaded with debt and one has none. One sits in a high-tax state, one in a low-tax one. One took a big write-up in an acquisition and now carries heavy D&A. Their net income figures look nothing alike, yet the underlying business is the same. EBITDA scrubs out those differences so you can compare operating performance on a level field. That's exactly why the most common multiple in comparable company analysis is EV/EBITDA: enterprise value is capital-structure-neutral, and so is EBITDA, so the numerator and denominator speak the same language.