EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
What is EBITDA?
- Operating profit + depreciation family
- A comparison metric that removes differences in capital structure and accounting
- Don’t confuse it with actual cash flow
The moment you make EBITDA your benchmark, the conversation in the meeting room changes. When you report operating profit, the first question is "Why is profit only this much?" With EBITDA, the question shifts to "How much did the equipment earn this quarter?" Separating when the investment was made from when its performance is judged is what this metric actually does. That is why it is used to compare on equal footing a business unit with heavy depreciation right after an expansion, a subsidiary carrying large goodwill and intangible assets from an acquisition, and an affiliate that relies heavily on debt.
There are two ways to calculate it. One adds depreciation and amortization to operating profit; the other works backward from net income by adding back interest, income taxes, and D&A, and the results differ because of how non-operating items are treated. In bank credit reviews, the net debt ÷ EBITDA multiple usually has a warning line at 3–4x, and in M&A, prices are negotiated in an EV/EBITDA range of 5–10x depending on the industry. However, since IFRS 16 took effect in 2019, operating lease payments are split into depreciation and interest, so for companies that rent stores or logistics centers, EBITDA often rises because of the accounting standard, not because of real performance.
The most common mistake is reading EBITDA like a bank balance. When receivables collections slip and inventory piles up, a company with EBITDA of KRW 5 billion (≈ US$3,740,800) may be left with only around KRW 1 billion (≈ US$748,200) in cash. The second trap is taking Adjusted EBITDA at face value, where restructuring costs, legal fees, and inventory write-offs are written off every year as "one-offs." If the sale multiple is 7x, a KRW 500 million (≈ US$374,100) adjustment means a KRW 3.5 billion (≈ US$2,618,600) difference in price, so sellers push to add back as much as they can. If you apply a multiple without first subtracting maintenance CAPEX and working capital increases from EBITDA, the repayment schedule can break within a year of the acquisition.
Jinho DanAccounting instructor who makes financial statements, costing, and tax easy to understand
Eunpyo HongExpert in company analysis, startups, and investment fundraisingIt became standard during the 1980s U.S. leveraged buyout (LBO) boom, when buyers used it to gauge a target company’s ability to repay debt.
Consider a hypothetical case: Company A, a food packaging manufacturer with 180 employees and KRW 54 billion (≈ US$40,401,000) in annual revenue. A line expansion two years ago pushed depreciation up to KRW 3.8 billion (≈ US$2,843,000) a year and dragged operating profit down to KRW 1.2 billion (≈ US$897,800). The company's main bank put both the loan extension and new facility financing on hold. The finance team spent three weeks rebuilding its materials to convince the credit officer.
- The CFO added KRW 3.8 billion (≈ US$2,843,000) in depreciation to KRW 1.2 billion (≈ US$897,800) in operating profit to arrive at EBITDA of KRW 5 (≈ US$1) billion, then told the credit officer, "That KRW 3.8 billion (≈ US$2,843,000) was spent two years ago. It isn't cash that left our account this year."
- The bank’s credit analyst pointed to net debt of KRW 21 billion (≈ US$15,711,500) divided by EBITDA of KRW 5 (≈ US$1) billion, or 4.2x, and countered: "The covenant is 4x, and you have already exceeded it."
- The finance director estimated maintenance CAPEX at KRW 1.1 billion (≈ US$823,000) a year for the next three years and working capital needs from sales growth at KRW 900 million (≈ US$673,400) a year. They then built a separate table showing that the cash actually available for repayment was KRW 3 billion (≈ US$2,244,500).
- When the CEO excluded KRW 600 million (≈ US$448,900) in line commissioning losses as one-offs and presented an adjusted EBITDA of KRW 5.6 (≈ US$1) billion, the accountant handling due diligence pushed back: "Losses incurred during normal ramp-up aren’t an eligible adjustment."
- In the end, the repayment schedule was based not on EBITDA of KRW 5 billion (≈ US$3,740,800) but on KRW 3 billion (≈ US$2,244,500) after CAPEX and working capital. It was extended from 5 to 7 years and approved, cutting the annual principal and interest burden from KRW 4.2 billion (≈ US$3,142,300) to KRW 2.9 (≈ US$1) billion, a reduction of KRW 1.3 billion (≈ US$972,600).