Two companies report identical net profit. One carries ₹500 crore in debt; the other holds no debt at all. Net profit cannot answer which business runs better — it mixes operating performance with financing decisions, tax structures, and accounting choices. EBITDA separates those layers.

EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortisation — measures a business's core operating profitability before financing choices and accounting conventions distort the picture.

The formula

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation

Or equivalently, starting from the top:

EBITDA = Revenue − Operating Expenses (excluding D&A)
       = EBIT + Depreciation + Amortisation

Both routes arrive at the same number. Most analysts start from the income statement and add back the four items to net profit.

What each add-back removes

The result is a closer proxy for the cash a business generates from its actual operations — before it pays lenders, governments, and accountants.

EBITDA margin: the ratio that matters for comparison

The absolute EBITDA figure tells you the size of operating profit. The EBITDA margin tells you the quality:

EBITDA Margin = EBITDA / Revenue × 100

A company with ₹1,000 crore revenue and ₹200 crore EBITDA has a 20% margin. Compare this to an industry peer at 12% margin and the operating advantage is immediately visible — regardless of how each company is financed or taxed.

Example: Bharti Airtel runs a capital-intensive telecom business with enormous depreciation on towers and spectrum. Its net margin is thin. Its EBITDA margin is structurally much higher — the add-back of depreciation restores the view of what the business actually earns from operating customers before it accounts for network investment. Strip that out and Airtel's EBITDA margin of ~40–45% tells a very different story than net profit alone.

Where analysts use EBITDA: the EV/EBITDA multiple

The most common use of EBITDA in valuation is the EV/EBITDA multiple:

EV/EBITDA = Enterprise Value / EBITDA

Enterprise Value (market cap + net debt) represents the total cost of buying the business outright. Dividing by EBITDA gives the multiple an acquirer pays per rupee of operating cash flow. It is the preferred multiple in M&A and private equity because it is capital-structure neutral — you can compare a debt-heavy manufacturer to a debt-free software firm on the same basis.

A sector's "normal" EV/EBITDA range depends on growth, capital intensity, and competitive dynamics. Consumer staples trade at 15–25×; commodity businesses at 4–8×; high-growth tech at 30–60×. What matters is the relative position within a sector, not an absolute number.

Where EBITDA misleads

EBITDA has a known blind spot: it ignores capital expenditure.

A factory with old machinery reports high EBITDA because depreciation is added back — but that depreciation represents real economic wear that will require real cash to replace. Warren Buffett has called EBITDA a "distorted" measure precisely because it treats D&A as irrelevant when capital-intensive businesses must continuously reinvest to maintain their earnings.

Three situations where EBITDA overstates reality:

1. High-capex businesses (telecom, airlines, manufacturing) — maintenance capex is a genuine cost of staying in business.
2. Heavy acquisitions — amortisation of goodwill inflates EBITDA without improving operations.
3. Working capital strain — EBITDA is not cash flow; a business can show high EBITDA while actually consuming cash due to inventory build or slow receivables.

The corrective is EBITDA minus capex, sometimes called "maintenance EBITDA" or approximated by Free Cash Flow, which is the better measure when capital intensity is high.

The decision rule

Use EBITDA when:

• Comparing companies across different capital structures or tax jurisdictions.
• Sizing a business for acquisition (EV/EBITDA).
• Measuring debt capacity (lenders often set covenants as Net Debt / EBITDA ≤ 3×).

Use Free Cash Flow instead when:

• The business is capital-intensive.
• You want to know what cash is actually available to shareholders.
• Depreciation and capex are materially different (a sign the asset base is aging).

Try this

Pull up any company on JustJot.ai, open its financial summary, and compare EBITDA margin across the last five years. A stable or rising margin with growing revenue is the core operating signal to look for. Then check whether free cash flow tracks EBITDA closely — if it diverges downward, the business is consuming more cash than the income statement suggests.

Related: [What Is Free Cash Flow?](what-is-free-cash-flow.md) · [What Is a P/E Ratio?](what-is-a-pe-ratio.md) · [What Is Return on Invested Capital (ROIC)?](what-is-roic.md)