The EBITDA Enigma: What EBITDA Reveals (and What It Doesn’t)
[INT. 221B BAKER STREET – LATE EVENING]
The candles had burned low, casting elongated shadows across the income statement.
WATSON: Holmes, this startup boasts an EBITDA of $20 million… but they’re bleeding cash.
HOLMES: Ah, EBITDA — the most seductive of all financial illusions. Come, Watson. Let’s unravel this alphabet soup.
🔍 What Is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a non-GAAP metric often used to measure a company’s operating performance — as if debt, taxes, and wear & tear didn’t exist.
It’s useful… until it’s misused. Many companies tout EBITDA as if it were equivalent to cash flow. It isn’t.
🧮 The Calculation
| Metric | Formula | Why It Matters |
|---|---|---|
| EBITDA | Net Income + Interest + Taxes + Depreciation + Amortization | Strips out costs not related to core operations |
| EBIT | Net Income + Interest + Taxes | Focuses on pre-tax operating earnings |
| Net Income | Revenue – All Expenses | Bottom-line profit for shareholders |
📚 Case Example: WeWork (2019)
WeWork famously presented a custom metric called “Community Adjusted EBITDA.” It excluded not just interest and depreciation, but also **marketing**, **office expenses**, and **other recurring costs**.
Despite showing massive EBITDA figures, the company lost over $1.6 billion in 2018.
💣 Red Flags When EBITDA is Abused
- 🚩 High EBITDA, negative cash flow from operations
- 🚩 Custom EBITDA metrics that remove recurring costs
- 🚩 M&A-heavy firms hiding amortization from acquisitions
- 🚩 Leverage and interest expenses ignored completely
🔬 Forensic Lens: Questions to Ask
- What is the difference between EBITDA and actual operating cash flow?
- Are depreciation and amortization being excluded to hide capital intensity?
- How do EBITDA margins compare to peers in the same industry?
- Are they borrowing heavily while touting a “positive EBITDA”?
“There is nothing more deceptive than an obvious EBITDA margin.” — Holmes
🧠 Detective’s Note
EBITDA can be useful — like a lantern in a tunnel. But don’t mistake it for daylight. Always follow the full trail: from EBITDA → to EBIT → to Net Income → to Cash Flow.