Best Response

Why EBITDA for what?

Assuming you mean why use it in ratios, a la EV/EBITDA rather than P/E or something... in theory EBITDA is supposed to be a better representation of cash generation from operations and takes out the financial aspects of the company like debt, taxes, and even depreciation. Unfortunately, in reality EBITDA is (as Charlie Munger says) just another word for "bullshit earnings." It's arbitrary insofar as depreciation is taken out when it very well could be a consistent charge against operations, and even interest can be seen the same way in many cases.

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Depends on the context.

EBITDA is a better proxy for cash flow.

Less mature companies and companies in certain spaces, such as tech, often have non-existent or negligible earnings. If you want to do a meaningful comp or precedents analysis, you need to use revenue or EBITDA in those instances instead.

EBITDA is unleveraged (before interest), so it is a proxy for cash available to all investors (both debt and equity holders); you use a multiple of EBITDA to find the company's enterprise value, whereas P/E gives you equity value.

Private companies don't trade in the public markets, so valuation is more enterprise oriented, requiring an unleveraged financial metric such as EBITDA.

 

The most common reason I've seen is that EBITDA excludes a lot of bullshit that you can dick around with; I, T, D and A can all vary widely between companies even within the same industry and country, and excluding them gives you a better idea of what a company's really worth.

As BlackHat notes above, though... it's still pretty full of shit. Just perhaps a little less so than net income.

 

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