The Most Used — and Most Abused — Financial Metric
Open any analyst report, M&A deal announcement, or company earnings release and you will encounter EBITDA. It is the universal language of corporate finance — used to value companies, set debt covenants, compare peers, and justify acquisition premiums.
Yet EBITDA has fierce critics. Charlie Munger called it "bullsh*t earnings." Warren Buffett has said companies that emphasise EBITDA are hiding something. Understanding why they say this — and when they are wrong — makes you a sharper investor.
This guide explains EBITDA, its formula, EBITDA margins across Indian sectors, the EV/EBITDA valuation multiple, and the critical distinction between when EBITDA is useful and when it flatters a mediocre business.
What Is EBITDA?
EBITDA = Earnings Before Interest, Tax, Depreciation, and Amortisation
In simpler terms: EBITDA is operating profit before the company accounts for the wearing out of its assets (depreciation), debt costs (interest), and government taxes.
It was originally developed to allow cross-country and cross-capital-structure comparisons — a US company and an Indian company with different tax rates and different levels of debt can be compared on EBITDA margins more fairly than on net profit margins.
EBITDA Margins Across Indian Sectors
Sector
Typical EBITDA Margin
Why
Telecom (Jio, Airtel)
40–55%
High depreciation; EBITDA flatters vs PAT
FMCG (HUL, Nestle)
18–28%
High margin, low capex — EBITDA ≈ real profit
IT Services
22–28%
Asset-light; D&A small — EBITDA accurate
Pharma
18–26%
R&D capitalisation can distort
Cement
18–25%
High D&A — EBITDA overstates real profit
Steel / Metals
10–22% (cyclical)
Commodity pricing swings dominate
Real Estate
20–35%
Project-based; timing distorts
Illustrative ranges for educational purposes. Always verify with current data.
The EV/EBITDA Multiple — Valuation Beyond PE
The EV/EBITDA multiple is widely used in M&A and cross-company valuation because it accounts for debt, unlike the PE ratio.
EV = Market Cap + Total Debt − Cash | EV/EBITDA = EV ÷ EBITDA
Two companies with the same market cap but different debt loads will have different EVs. The one with more debt has a higher EV — and EV/EBITDA captures this. This is why debt-heavy companies often look cheap on PE but not on EV/EBITDA.
Indian FMCG: EV/EBITDA of 30–50x (premium for quality)
IT Services: 15–25x
Cement: 10–18x
Steel (cyclical peak): 6–10x
When to Use EBITDA — and When to Ignore It
Use EBITDA When:
Comparing companies with very different debt levels (EBITDA strips out interest)
Comparing across different tax jurisdictions (strips out tax differences)
A company has recently made large capex and D&A is temporarily inflated
Analysing a company's debt servicing capacity (banks use EBITDA for loan covenants)
Ignore EBITDA When:
Capital-intensive businesses: For a cement or telecom company, depreciation is a massive real cost — replacing towers and cement plants is unavoidable. EBITDA can make these businesses look far more profitable than they actually are.
Debt-heavy companies: EBITDA ignores interest expense. A company with ₹5,000 crore debt paying ₹500 crore interest per year looks much better on EBITDA than on any after-interest metric.
When manipulating "adjusted EBITDA": Many companies strip out stock-based compensation, restructuring charges, and "non-recurring" costs to show "adjusted EBITDA." When these items recur year after year, they are not non-recurring.
"When somebody says 'EBITDA,' I think I hear them saying 'bullsh*t earnings.' People who use EBITDA are either trying to deceive you or they're deceiving themselves."
— Charlie Munger (approximate, widely reported)
Buffett's Alternative:
Buffett prefers "owner earnings" — net profit + D&A − maintenance capex − working capital changes. This is similar to free cash flow and represents the actual cash a business generates for its owners after keeping the business running. It is more conservative and more honest than EBITDA.
Master Fundamental Analysis — Read the Complete Guide
EBITDA is one metric among many. Learn how to use PE, EV/EBITDA, FCF, ROE, ROCE, and balance sheet analysis together to evaluate any Indian stock.
EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation. It is calculated as Revenue minus Cost of Goods Sold minus Operating Expenses, before deducting interest, tax, depreciation, and amortisation. EBITDA essentially represents the operating cash profit of a business before accounting choices (D&A) and financing decisions (interest and tax) are applied, allowing operational comparisons across different companies and geographies.
EV/EBITDA = Enterprise Value ÷ EBITDA. Enterprise Value (EV) = Market Cap + Total Debt − Cash. EV/EBITDA is a valuation multiple that accounts for a company's debt structure, unlike the PE ratio which only uses market cap. Two companies with the same market cap but different debt levels will have different EVs — EV/EBITDA captures this. For Indian large caps, EV/EBITDA of 10–20x is typical; high-quality FMCG companies can trade at 30–50x.
Charlie Munger has called EBITDA "bullsh*t earnings" and Buffett has made similar criticisms. Their argument: depreciation is a real economic cost — machinery wears out and must be replaced eventually. Adding it back to get EBITDA pretends this cost doesn't exist. For capital-intensive businesses (cement, telecom, manufacturing), D&A can be enormous. EBITDA flatters these businesses by hiding a recurring, unavoidable cost. Both Buffett and Munger prefer metrics based on actual cash generation — like free cash flow or "owner earnings."
EBITDA is most useful for comparing operational efficiency across companies with different capital structures, comparing companies across different tax jurisdictions, assessing early-stage companies with high depreciation from recent capex that will normalise over time, and in leveraged buyout analysis where debt service capacity matters. It is also widely used in debt covenant calculations — lenders often set covenants like "Net Debt must stay below 3x EBITDA."
EBITDA adds back depreciation to EBIT but ignores working capital changes. Operating Cash Flow starts from net profit, adds back D&A, and also adjusts for all working capital changes — receivables, inventory, payables. OCF is more conservative and more representative of actual cash generation. A company can have high EBITDA but poor OCF if working capital is consuming cash (rising receivables or inventory buildup). Always prefer OCF over EBITDA as a cash generation measure.
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