What Is EBITDA? A Plain-English Guide with Real Examples

EBITDA meaning: what each letter removes

Each letter is an expense that EBITDA ignores:

• Interest — what the company pays on its debt. Removing it lets you compare businesses with very different balance sheets.
• Taxes — income tax. Removing it helps compare companies in different tax situations.
• Depreciation — the gradual write-off of physical assets like factories, servers and trucks.
• Amortization — the same thing for intangible assets: software, patents, and customer relationships picked up in acquisitions.

Depreciation and amortization are accounting charges. The cash left the building when the asset was bought; the income statement spreads that cost over years. That's why EBITDA is often described as a rough proxy for operating cash flow. "Rough" is doing a lot of work in that sentence.

The EBITDA formula

The quickest way to calculate it:

EBITDA = operating income + depreciation and amortization

You can also build it from the bottom up: net income + taxes + interest + D&A. The D&A figure usually comes from the cash flow statement, since many companies bury it inside other expense lines on the income statement.

Here's DoorDash's second quarter of 2026, which conveniently breaks out D&A as its own line ($ millions):

Three different "profits" for the same quarter: $200M, about $451M, and $914M. None of them is wrong. They answer different questions, and the gap between the last two is where things get interesting. You can see the whole flow in our DoorDash earnings breakdown.

EBITDA vs. net income

Net income is what's left for shareholders after everything: costs, interest, taxes, and non-cash charges. EBITDA stops several steps earlier. The differences matter most in three kinds of companies:

• Heavily indebted ones, where interest eats a big share of operating profit. EBITDA looks fine; shareholders see little of it.
• Capital-intensive ones — telecom, energy, chipmakers, data centers — where depreciation is large because the business constantly has to replace expensive equipment.
• Serial acquirers, where amortization of purchased intangibles drags down GAAP earnings for years after a deal.

Why companies (and lenders) love EBITDA

There are legitimate reasons EBITDA is everywhere:

1. Comparing operating performance. Two companies with different debt loads and asset ages will show very different net income. EBITDA puts them on closer footing.
2. Measuring leverage. Lenders look at net debt / EBITDA — roughly how many years of operating earnings it would take to pay off debt. Under 2x is generally comfortable; above 3–4x starts to draw attention.
3. Valuation. EV/EBITDA (enterprise value, meaning market cap plus net debt, divided by EBITDA) is the standard way to compare what investors are paying for businesses with different capital structures.

With made-up numbers: a company with a $40 billion market cap, $20 billion of net debt and $15 billion of EBITDA has an enterprise value of $60 billion, an EV/EBITDA of 4x and net debt/EBITDA of about 1.3x, comfortable by the rule of thumb above. Try your own company's figures:

Where EBITDA misleads

Warren Buffett has spent decades mocking EBITDA, and his core complaint is simple: depreciation is a real expense. Equipment wears out and must be replaced, and EBITDA pretends that bill never comes. Here's where to be careful.

It ignores capital spending

A company can post strong EBITDA while spending even more on capex just to stand still. The only way to catch this is to check free cash flow — operating cash flow minus capital expenditures. AMD, for instance, generated $2,366M of operating cash flow in Q2 2026 and spent $808M on capex, leaving $1,558M of free cash flow. That's the number that can actually fund buybacks and dividends. More in our guide to free cash flow.

Adjusted EBITDA is whatever the company says it is

GAAP doesn't define EBITDA at all, let alone "adjusted" EBITDA. Companies choose what to add back, and the list tends to grow. DoorDash's $914M of adjusted EBITDA in Q2 2026 compares with $156M of GAAP operating income. The bridge includes $295M of D&A, about $349M of stock-based compensation, and $98M of legal, tax and regulatory settlements, among other items.

Each adjustment has an argument behind it. Stock comp doesn't use cash. Settlements are "one-time." But employees get paid in stock every single quarter, and settlements have a way of recurring.

It ignores working capital

EBITDA doesn't care whether customers have paid their bills or whether cash is tied up in inventory. A fast-growing company can report record EBITDA while its bank balance shrinks.

It ignores the cost of debt

EBITDA margin

EBITDA margin is EBITDA divided by revenue. It's useful for comparing companies in the same industry and for tracking one company over time. The range is huge across sectors: grocery retailers live on single-digit margins, while software can run far higher. AppLovin reported an adjusted EBITDA margin of 84% in Q2 2026 — alongside a GAAP operating margin of 77.7%, which tells you its adjustments are relatively modest. A small gap between adjusted and GAAP numbers is itself a quality signal. See the AppLovin breakdown.

How to use EBITDA without getting fooled

• Compare EBITDA within an industry, not across industries.
• Look at the trend in EBITDA margin, not just the dollar amount.
• Always check capex and free cash flow alongside it.
• For leverage, pair net debt / EBITDA with interest coverage (operating income divided by interest expense).
• If you see "adjusted," find the reconciliation and add up what was excluded.

For the bigger picture of how revenue turns into profit, read Revenue vs. Net Income, and for a walkthrough of a whole report, How to Read an Earnings Report in 5 Minutes.

How this guide was made: the draft was written with the help of our model (AI); facts and figures were checked against primary sources (listed above). How we make it