What is EBITDA and what is it for when analysing a stock?
Updated June 27, 2026 · DeepTicker
EBITDA is a company's earnings before interest, taxes, depreciation and amortization (Earnings Before Interest, Taxes, Depreciation and Amortization). It is used to measure the operating profitability of the business without debt, taxes or the accounting entries for depreciation distorting the comparison. It is very popular, but it has a key catch: EBITDA is not free cash flow.
What EBITDA is and why it matters
EBITDA tries to answer a simple question: how much does the company earn by operating, before bringing into the equation how it is financed (interest), what it pays the tax authorities (taxes) and certain accounting entries that are not cash outflows of the year (depreciation and amortization)? It is one of the most cited figures in the financial world precisely because it allows companies to be compared "on a level playing field", clearing away factors that do not depend on the quality of the business itself.
It is calculated in two equivalent ways. The direct one: start from operating profit (EBIT) and add back depreciation and amortization. The indirect one: start from net profit and add back interest, taxes and depreciation and amortization. Both arrive at the same place. The conceptual key is that EBITDA adds depreciation and amortization back to profit because, although they are an expense in the accounts, they do not mean the company paid anything that year: they are the allocation of the cost of assets bought some time ago.
The big reason for its popularity is comparability. Two companies in the same sector can have very different net profits simply because one has a lot of debt (pays more interest), is taxed in a high-tax country or bought its factories recently (depreciates more). EBITDA neutralises those three differences and lays bare pure operating profitability. That is why it is used so much in multiples valuation (the famous EV/EBITDA) and in mergers and acquisitions.
It is also the basis of one of the most closely watched solvency ratios: net debt / EBITDA, which measures how many years of operating profit the company would need to pay off all its debt. A ratio of 1x is very comfortable; one of 5x or more starts to be worrying in most sectors. Banks impose limits on this ratio in their loan agreements (the so-called covenants), which gives an idea of how central EBITDA is for judging financial risk.
Now the warning that all serious investors repeat, starting with Warren Buffett: EBITDA is not free cash flow and treating it as such is one of the most expensive mistakes there is. EBITDA ignores two very real cash outflows: the capital investment (capex) the company needs just to keep its assets standing, and the change in working capital (receipts and payments). A capital-intensive company can boast a huge EBITDA and yet leave almost no cash for the shareholder after reinvesting.
That is why EBITDA has earned a reputation as a "marketing" figure. Companies that lose money at the net level, or that carry a lot of debt, tend to highlight their EBITDA in presentations because it is the metric that makes them look best. It is not that EBITDA lies: it is that it tells only part of the story, the operating part before investment and financing. That is why it must always be read alongside EBIT, capex and free cash flow.
In DeepTicker EBITDA is one more piece, not a verdict. It feeds the Profitability dimension of the DeepScore (via EBITDA margin) and the Solvency dimension (via net debt/EBITDA), always compared with the sector. But the underlying question —"is it expensive or cheap?"— is answered by the Reverse DCF discounted cash flow model, which models real cash flows, not EBITDA, and calculates what growth and what margin the price is discounting. Because every number comes explained, you learn why EBITDA is useful but insufficient, and you stop falling into the trap of confusing it with the money the company really earns.
How EBITDA is calculated
EBITDA = EBIT + Depreciation + Amortization (= Net profit + Interest + Taxes + D&A)
- · EBIT: operating profit or operating result (before interest and taxes)
- · Depreciation: accounting allocation of the wear and tear on tangible assets (machines, buildings)
- · Amortization: accounting allocation of intangible assets (patents, goodwill, software)
- · Indirect route: net profit + interest + taxes + depreciation and amortization
- · EBITDA margin: EBITDA divided by sales, to measure profitability relative to size
Example of EBITDA
A telecommunications company reports operating profit (EBIT) of €300 million and depreciation and amortization of €400 million (it has a vast network and infrastructure). Its EBITDA = 300 + 400 = €700 million. On sales of €2,000 million, that is an EBITDA margin of 35%, a figure that looks spectacular in the investor presentation. The problem is what you don't see in that number: that same telecom spends €350 million on capex every year just to maintain and renew its network.
Let's do the honest math. Of the €700 million of EBITDA, after subtracting €350 of capex €350 remain; after the interest on its high debt (say €150 million) €200 remain; and after taxes, perhaps €150 million of real cash for the shareholder. That is, free cash flow is almost five times smaller than EBITDA. That is why in DeepTicker you don't settle for EBITDA: the Reverse DCF works with real cash flows and the Solvency dimension watches net debt/EBITDA (here, if net debt were €2,800 million, the ratio would be 4x, high). Seeing both sides prevents a brilliant EBITDA from making you overvalue the business.
How to interpret EBITDA
- →High and stable EBITDA margin: strong operating profitability; combine it with free cash flow to confirm it is real cash.
- →Net debt/EBITDA above 4-5x: elevated indebtedness; watch solvency and interest coverage.
- →EV/EBITDA well above the sector average: the market is discounting a lot of growth; check whether it is credible.
- →EBITDA much larger than free cash flow: a capital-intensive business; capex eats up much of the profit.
- →Adjusted EBITDA much higher than reported: the company is excluding recurring costs; read it with scepticism.
- →Positive EBITDA with negative net profit: debt or depreciation weighs heavily; investigate the financial structure.
Common mistakes with EBITDA
- ✕Treating EBITDA as free cash flow: it ignores capex and working capital, two very real cash outflows.
- ✕Comparing EBITDA or the EBITDA margin across different sectors: each industry has its own norm.
- ✕Relying on adjusted EBITDA without looking at what has been excluded: sometimes costs that are actually recurring are removed.
- ✕Forgetting net debt/EBITDA: a decent EBITDA with too much debt hides a solvency risk.
- ✕Valuing only by EV/EBITDA without looking at the quality of the business or the growth implied in the price.
How EBITDA is calculated step by step
The most intuitive route starts from the operating profit (EBIT) that appears in the income statement and adds back depreciation and amortization, which are usually detailed in the notes or in the cash flow statement. EBITDA = EBIT + D&A. It is the formula most analysts use because it starts from a figure already "clean" of operations.
The alternative route starts from net profit (the very bottom line) and undoes what had been subtracted from it: it adds back taxes, interest and depreciation and amortization. It arrives at exactly the same EBITDA. This route is useful when you only have net profit to hand and want to reconstruct the operating figure.
It is worth noting whether the EBITDA is reported or adjusted. Adjusted EBITDA cleans out non-recurring items (restructurings, acquisition costs, share-based compensation), and here companies sometimes get too "creative", excluding things that are real costs. DeepTicker works with standardised data so that the comparison between companies is honest.
Why EBITDA is not free cash flow
The fundamental criticism of EBITDA is that it ignores two very real cash outflows. The first is capex: the investment the company needs just to keep its assets running. The second is the change in working capital: the money tied up in inventory and pending receivables. EBITDA overlooks both, so it overestimates the available cash.
Free cash flow, by contrast, does deduct capex and working capital, and is the money that really remains to pay debt, dividends or buy back shares. The difference between EBITDA and free cash flow can be enormous in capital-intensive sectors (telecoms, energy, industry) and small in asset-light businesses (software, services).
The practical lesson, in line with what Warren Buffett repeats, is never to rely on EBITDA alone. When an indebted or loss-making company insists heavily on its EBITDA, it is worth asking what it is hiding underneath. DeepTicker shows you free cash flow alongside EBITDA precisely so that you can see the difference with your own eyes.
EBITDA, EV/EBITDA and net debt/EBITDA: what each one is used for
The EV/EBITDA multiple relates enterprise value (market capitalisation plus net debt) to EBITDA, and is one of the most used for valuation by comparables because it neutralises the capital structure. An EV/EBITDA of 8x is moderate in many sectors; one of 20x demands very high growth to be justified.
The net debt/EBITDA ratio measures indebtedness: how many years of operating profit it would take to repay all the debt. It is a central solvency thermometer; above 4-5x in unregulated sectors, the alarms go off and banks usually impose contractual limits.
The EBITDA margin (EBITDA/sales) measures operating profitability relative to size. The three ratios use EBITDA but answer different questions: valuation, indebtedness and profitability. DeepTicker integrates them into the DeepScore compared by sector, so that you don't read them in the abstract.
How to see the EBITDA of any stock in DeepTicker
In the DeepTicker search tool you type the ticker of any stock from the US, Europe, the IBEX or China and you see its EBITDA, its EBITDA margin, its EV/EBITDA and its net debt/EBITDA, alongside the historical evolution and the comparison with the sector. Everything calculated and, above all, explained, without having to touch an annual report.
Because DeepTicker does not settle for EBITDA but crosses it with free cash flow and with the Reverse DCF, you learn to read it critically: you see when a brilliant EBITDA hides a capex that eats it up. That transparency (no number is a black box) is what makes it so that the more you use the tool, the more you learn.
Remember that it is information and analysis so that you decide, with the rigour of professional frameworks made simple. DeepTicker does not recommend buying or selling, nor is it affiliated with any author: it applies published methods and public market data.
On DeepTicker you get this metric calculated and explained for thousands of stocks, with no spreadsheets.
Try DeepTicker free →Frequently asked questions about EBITDA
What does EBITDA mean?
It is the acronym for Earnings Before Interest, Taxes, Depreciation and Amortization: earnings before interest, taxes, depreciation and amortization.
How is EBITDA calculated?
By adding depreciation and amortization to operating profit (EBIT). It is also obtained by starting from net profit and adding back interest, taxes and depreciation and amortization.
Is EBITDA the same as profit?
No. EBITDA is profit before interest, taxes and depreciation, and it also does not deduct capex, so it is well above net profit and free cash flow.
What is a good EBITDA margin?
It depends on the sector: 20% is solid in general, but in software 30-45% is seen and in distribution a single digit is enough. Always compare it within its industry.
Why is EBITDA so heavily criticised?
Because it ignores capex and working capital, so it does not reflect the real cash the company generates. Investors like Warren Buffett warn that confusing it with free cash flow is an expensive mistake.
What is the difference between EBITDA and EBIT?
EBIT deducts depreciation and amortization; EBITDA adds it back. That is why EBITDA = EBIT + depreciation and amortization, and EBIT is the more conservative figure.
What is the net debt/EBITDA ratio for?
It measures how many years of operating profit the company would need to pay off all its debt. Below 3x is usually comfortable; above 5x, worrying.
Where can I see the EBITDA of a specific stock?
In the DeepTicker search tool: you enter the ticker and see EBITDA, its margin, EV/EBITDA and net debt/EBITDA compared with the sector, all explained.
Educational content by DeepTicker. This is not financial advice or a recommendation to buy or sell. Investing involves risk of loss.
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