EBITDA
EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortisation — is a proxy for a company's core operating cash generation, stripping out the effects of financing decisions and non-cash charges.
EBITDA is derived by taking net profit and adding back interest expense, income tax, depreciation, and amortisation. The result is an approximation of the cash a business generates purely from its operations, before servicing debt, paying taxes, or accounting for the wear and tear of assets. It is widely used in merger and acquisition valuations and in credit analysis.
In India, EBITDA is the lingua franca of corporate earnings discussions. During quarterly results calls, management teams and analysts focus heavily on EBITDA margins — EBITDA as a percentage of revenue — as the primary indicator of operating health. For sectors like telecom, aviation, and cable, where depreciation is enormous, EBITDA provides a cleaner view of cash-level profitability than net profit. Bharti Airtel's path to re-rating after the Jio-disruption era was largely narrated through improving EBITDA margins and declining debt relative to EBITDA.
The EV/EBITDA multiple is the dominant valuation metric in many industries precisely because it neutralises differences in capital structure and depreciation policies. A company that aggressively capitalises expenditure will show higher EBITDA than one that expenses similar costs — so analysts must read accounting policy notes carefully.
However, EBITDA has important limitations that are sometimes glossed over. Warren Buffett famously described it as a misleading metric because it excludes depreciation, which represents real economic wear. A manufacturing plant or telecom tower does deteriorate and eventually needs replacement; that cost is as real as any cash outlay. Charlie Munger went further, calling companies that promote EBITDA as their headline figure worthy of scepticism. Indian infrastructure companies with large debt loads but high EBITDA can appear deceptively healthy on that single metric.
The adjustments companies make to arrive at 'adjusted EBITDA' or 'normalised EBITDA' also deserve scrutiny. Recurring exceptional items — restructuring charges, one-time write-offs — that are added back to EBITDA year after year are not truly exceptional and should be considered part of the company's operational cost structure.