What is EBITDA?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
EBITDA is earnings before interest, taxes, depreciation and amortization — a proxy for operating cash earnings that ignores financing choices and non-cash accounting charges. It lets you compare businesses regardless of leverage, tax jurisdiction and asset-accounting policy, which is why EV/EBITDA is the standard headline multiple. Its limits matter as much as its uses: EBITDA is not cash flow — it ignores working-capital movements and capital expenditure — and 'adjusted' EBITDA can hide recurring costs relabeled as one-offs. For capital-intensive businesses, EBIT or EBITDA minus capex is often the more honest metric.
WHAT INTERVIEWERS LISTEN FOR
- ✓Operating-earnings proxy comparable across capital structures, tax regimes and D&A policies
- ✓Pairs with enterprise value — EV/EBITDA is the standard operating multiple
- ✓NOT cash flow: ignores working-capital movements and capex
- ✓Adjusted EBITDA deserves scrutiny — one-off vs. recurring is where deals are fought
COMMON MISTAKES
- ✗Calling EBITDA 'cash flow' without qualification
- ✗Accepting management's adjusted EBITDA at face value
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CORE QUESTIONS IN THIS CLUSTER
- Walk me through a DCF.
- How do you calculate WACC?
- What is WACC?
- What is enterprise value?
- What is the difference between Enterprise Value and Equity Value?
- What is the difference between the Gordon Growth Model and the Exit Multiple Method for terminal value?
- Walk me through the three financial statements and how they connect.
RELATED QUESTIONS
- Walk me through the Enterprise Value bridge.
- Why can't you use Equity Value / EBITDA?
- A company has $100m face value of in-the-money convertible bonds (conversion price $20, current share price $30). How should you treat the convertible in the enterprise-value bridge? Walk through the calculation.
- How do you incorporate a company's excess cash and non-operating assets into a valuation?
- What is the correct treatment of minority interest in Enterprise Value and valuation multiples?
- A company has a market cap of $500M, total debt of $200M, cash of $50M, and 10 million shares outstanding. It also has 1 million in-the-money stock options with an exercise price of $20. The current stock price is $50. What is the diluted Enterprise Value?