🕯️ [INT. FINACADEMICS OFFICE – LATE EVENING]
A storm rumbles outside. Holmes lounges by the fireplace, violin in hand. Watson flips through an investor deck, eyebrows raised higher with each slide.

WATSON:
Holmes, I’ve encountered this blasted term again—EBITDA. Every startup swears by it like it’s holy scripture. But what does it actually mean?

HOLMES:
Ah, EBITDA, Watson. A charming illusionist if wielded poorly… but a helpful tool in the right hands. Let’s dissect the acronym and then trace its motives.

🧪 Breaking Down EBITDA

EBITDA stands for:

• Earnings
• Before
• Interest
• Taxes
• Depreciation
• Amortization

In simple terms, it’s Net Income before deducting interest, taxes, depreciation, and amortization. It attempts to show a company’s profitability from core operations — before financing decisions, tax jurisdictions, and accounting quirks come into play.

“EBITDA is like inspecting a house based on its foundation—ignoring the peeling paint and leaky taps.”

📜 EBITDA Formula

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Alternatively, if you’re starting from the top line:

EBITDA = Revenue – COGS – Operating Expenses (excluding D&A)

📊 EBITDA vs. Net Income – Table of Contrast

🧠 Why EBITDA Exists

EBITDA helps in comparing companies across different tax structures, capital structures, and depreciation policies. It’s like comparing athletes without considering their shoes or sponsorships.

It’s particularly useful for:

• Valuation: Used in EV/EBITDA multiples.
• Cross-border comparisons: Tax neutrality.
• Cash approximation: Before non-cash items like depreciation.

🧨 The Dangers of EBITDA

While helpful, EBITDA is frequently abused to mask weak profitability.

• No CapEx Consideration: Ignores how capital-intensive the business is.
• Misses Financing Reality: Debt-heavy firms look better than they should.
• Used to Inflate Valuation: Startups boast “adjusted EBITDA” by removing even legitimate costs.

💥 Live Case: WeWork (2019)

WeWork infamously introduced “Community Adjusted EBITDA” — excluding not just depreciation and amortization but also marketing, admin, even operating expenses. The result? A glossy, inflated number that bore no relation to reality.

Investors were dazzled — until the IPO crumbled and the CEO was ousted.

📚 Case Study: Enron (2001)

Enron also leaned heavily on EBITDA to paint a picture of strong operating performance. Behind the scenes, their actual profitability was withering under debt and failed investments.

EBITDA made the numbers look alive. But in reality, the company was dead inside.

📐 Better Metrics to Complement EBITDA

• Operating Cash Flow: Shows actual cash from core operations.
• Free Cash Flow (FCF): EBITDA – CapEx – Working Capital
• Net Debt/EBITDA: Risk indicator for over-leverage.
• Interest Coverage Ratio: EBIT / Interest Expense

📌 Analyst’s Red Flags

• EBITDA growing while net income declines
• Use of non-GAAP adjustments without clear rationale
• CapEx missing in analysis for capital-heavy businesses
• Comparing EBITDA across industries without adjusting for asset intensity

📉 Simulation Table: Real vs. EBITDA vs. FCF

🔎 Sherlock’s Final Word

EBITDA is not the villain. But it must be cross-examined like any clever witness. It speaks fluently but hides what matters — debt, taxes, investment.

“It is the undisclosed that hides the truth. EBITDA is merely a glance — not a verdict.”

🧠 Detective’s Note: Use EBITDA as a compass, not a destination. Always pair it with real cash metrics, context, and common sense.

“There is a big difference between what is profitable and what is sustainable.”
– Sherlock Holmes, The Case of the Confused Investor