For years, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) has been promoted as a key measure of financial performance.
Businesses use it to present themselves in the best possible light, and investors often rely on it to compare companies.
But there’s a problem and a key reason why people do not like EBITDA!
And that is because EBITDA hides critical costs, inflates earnings, and can give a false sense of profitability.
Many of the biggest financial scandals in history involved companies that aggressively promoted EBITDA while their actual cash flow collapsed.
If EBITDA is so useful, why do so many experienced investors distrust it?
Let’s examine why EBITDA often misleads more than it informs.
EDITDA Was Designed to Sell a Story
EBITDA’s popularity can be traced back to the 1980s when leveraged buyout firms needed a way to convince banks to lend them money.
By stripping out key expenses, they could make struggling businesses look profitable enough to take on more debt.
Today, companies continue to use EBITDA to present an optimistic view of their performance, but it often paints an unrealistic picture.
The fundamental issue is simple: EBITDA is not real profit. It is an artificial number that ignores essential business costs.
The 3 Biggest Problems With EBITDA
1. EBITDA Ignores Real Costs
One of the most misleading aspects of EBITDA is that it excludes depreciation and amortisation—even though these represent the real cost of using assets over time.
Take two transport businesses:
- Company A buys its fleet of delivery vans outright.
- Company B leases its vans instead of purchasing them.
If you only look at EBITDA:
- Company A’s EBITDA looks stronger because depreciation on its vans is excluded.
- Company B’s EBITDA looks weaker because lease payments are included as an operating expense.
But in reality, Company A will eventually need to replace its vehicles, which is a major long-term cost. EBITDA ignores this, making the business seem more profitable than it actually is.
This is why Warren Buffett has warned against EBITDA, pointing out that depreciation is a very real expense—it’s just paid upfront instead of monthly. EBITDA treats it as if it doesn’t exist.
“I think you would understand any presentation using the word EBITDA if every time you saw that word, you just substituted the phrase with bullsh*t earnings”
Charlie Munger
2. EBITDA Makes Unprofitable Businesses Look Profitable
Many companies with poor financials use EBITDA to obscure their true condition. Since it excludes interest and taxes, businesses with high debt burdens can appear far healthier than they are.
Consider a struggling retail chain:
- It has high loan servicing costs from borrowing to expand.
- Sales are declining, and its net profit is negative due to interest payments on its debt.
- However, the company highlights a strong EBITDA to reassure investors.
By focusing on EBITDA, the company ignores the reality that it is drowning in debt. It presents itself as profitable when, in fact, it may struggle to meet loan repayments.
This is how businesses can appear successful on paper but collapse in reality. EBITDA conveniently excludes loan interest, which can be a major expense for debt-heavy companies.
This allows struggling businesses to mask financial distress, misleading investors into believing they are more stable than they actually are.
3. “Adjusted EBITDA” Allows Companies to Manipulate the Numbers Even Further
As if EBITDA wasn’t misleading enough, some businesses go even further by using “Adjusted EBITDA.”
This version strips out even more costs, often under the justification that they are “one-time” or “non-recurring” expenses.
The problem? These “one-time” expenses have a habit of appearing year after year.
A company might exclude restructuring costs, legal expenses, or even stock-based compensation—expenses that directly impact the bottom line. The more adjustments a company makes to EBITDA, the less meaningful it becomes.
If a business highlights Adjusted EBITDA in its financial reports, investors should immediately ask what’s being left out. Often, the answer is: a lot.
Why Cash Flow – Not EBITDA – Is The Real Measure of Business Health
One of the most dangerous myths about EBITDA is that it represents a company’s ability to generate cash. This is simply not true.
A company can show strong EBITDA and still be on the verge of collapse because EBITDA does not measure actual cash flow.
A classic example is a company that sells products on credit:
- It records sales as revenue, boosting EBITDA.
- But if customers delay payments, the business has no actual cash to cover expenses.
This is why many “profitable” companies go bankrupt. They look good on an EBITDA basis but run out of cash when bills come due.
The Bottom Line: Be Wary of EBITDA!
If a company is aggressively promoting its EBITDA, investors should ask: “Why aren’t they talking about cash flow?”
While EBITDA can be a useful comparison tool in certain industries, it is often used to disguise financial weakness.
The most successful investors don’t rely on EBITDA alone—they look at real profitability and cash flow to understand a company’s true financial position.
A strong EBITDA might look impressive in a presentation, but unless it translates into real, sustainable cash flow, it’s nothing more than an illusion.
Investors who put too much faith in EBITDA risk backing businesses that look good on paper but won’t survive in the real world.
Before You Go …
Profit, EBITDA, and free cash flow all tell different stories about your business’ financial health.
Check out our next article where we break down the basics of all three in plain English to confirm which is the best one to focus on!
EBITDA Vs Cash Flow Vs Profit: Starter Guide To Tracking Your Business’ Health
