EBITDA

EBITDA is earnings before interest, taxes, depreciation and amortisation — operating profit with depreciation added back, used to gauge how much cash the business generates.

The purpose is comparability. Interest depends on debt structure, taxes on national systems, depreciation on accounting choices. Strip those away and what remains is the operating business itself.

It is used heavily in mergers and capital-intensive industries. In telecoms, cable and airlines, where initial investment is large and depreciation heavy, operating profit obscures the actual cash flow.

The problem is how easily it flatters. Warren Buffett pointed out that depreciation is real money leaving the business — equipment does eventually have to be replaced.

So a company emphasising EBITDA deserves a second look. Checking net profit and the actual cash flow statement alongside it reveals whether strong EBITDA hides a business steadily running dry.