Meaning and comparability
EBITDA is a profit measure before interest, income tax and depreciation and amortization of tangible and intangible assets. It helps compare some aspects of companies’ operations despite differences in financing and asset composition. The calculation, especially for adjusted EBITDA, requires a breakdown: the items excluded may not be the same for different issuers.
Why depreciation is excluded
If a manufacturer bought equipment, current depreciation reduces accounting profit but is excluded from EBITDA. This does not mean that the equipment costs the business nothing. The money may have been spent earlier, and new investment may later be needed to maintain production.
What EBITDA is not
EBITDA does not replace operating or free cash flow: it does not explain changes in inventories, customer payment deferrals or capital expenditure. A positive measure is compatible with a shortage of cash. When comparing companies, an investor checks the same period, the composition of adjustments, debt payments and the actual need to renew assets.