Question 1

Why do investors focus on EBITDA?

Accepted Answer

EBITDA isolates operational performance from financing decisions, tax strategies, and accounting methods. It provides a cleaner view of a company's ability to generate profits from core operations and facilitates comparison across companies.

Question 2

Is EBITDA the same as operating cash flow?

Accepted Answer

No, but EBITDA approximates cash-generating ability. True operating cash flow also accounts for working capital changes and non-operating items. EBITDA is a proxy, not a precise measure of cash flow.

Question 3

What is a good EBITDA margin?

Accepted Answer

EBITDA margins vary significantly by industry. Generally, 10-15% is considered moderate, 15-25% is good, and above 25% is excellent. Compare to industry peers rather than absolute standards.

Question 4

What is Adjusted EBITDA?

Accepted Answer

Adjusted EBITDA removes one-time or non-recurring items like restructuring costs, litigation expenses, or acquisition-related costs. Be cautious - companies sometimes aggressively adjust to present better numbers.

Question 5

Why did Warren Buffett criticize EBITDA?

Accepted Answer

Buffett noted that excluding depreciation ignores that assets wear out and must be replaced. He prefers owner earnings (net income + D&A - maintenance capex), which accounts for the capital needed to maintain business operations.

Question 6

How is EBITDA used in debt covenants?

Accepted Answer

Lenders use EBITDA-based covenants like Debt/EBITDA (leverage ratio) and EBITDA/Interest (coverage ratio). Breaching these covenants can trigger default provisions, so monitoring them is critical for leveraged companies.

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