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There’s a reason Private Equity (PE) firms cling to EBITDA like a drowning man to a life raft. It’s the one financial metric that can make even the most cash-burning, debt-ridden, soon-to-be-bankrupt company look like a profitable powerhouse. EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization – is often hailed as a measure of “true business performance,” a shortcut to understanding a company’s profitability without all those pesky financial realities getting in the way.
But here’s the uncomfortable truth: EBITDA is a fairy tale. It’s the finance world’s equivalent of an Instagram filter—conveniently airbrushing out the ugly bits while leaving behind an illusion of financial beauty. This metric conveniently ignores critical expenses, giving investors and lenders a misleadingly rosy picture of a company’s financial health. And yet, PE firms adore it, using EBITDA as a smoke-and-mirrors trick to justify overpriced acquisitions, load up companies with debt, and squeeze out short-term profits before flipping them for a tidy sum.
So, why does EBITDA lie, and why do so many people continue to fall for the deception? Let’s strip away the financial cosmetics and take a hard look at what’s really going on behind the numbers.
EBITDA – A Fictional Metric Wrapped in Finance Jargon
The “Earnings” in EBITDA – Now You See It, Now You Don’t
EBITDA starts with “earnings,” but it’s earnings with an asterisk the size of a small planet. The metric is designed to show how much money a company makes before considering some of its biggest, most inescapable expenses. The logic? Interest, taxes, depreciation, and amortization are all distractions from “core business performance.” That’s a nice thought—until you realize that every business on Earth has to pay interest, taxes, and reinvest in its operations.
Pretending these expenses don’t exist is like budgeting for a vacation without accounting for airfare or hotel costs. Sure, your trip to Paris looks affordable—until you actually try to get there. Similarly, EBITDA creates a world where earnings exist in a vacuum, unaffected by the realities of capital structure, tax obligations, and asset deterioration.
Depreciation & Amortization – The Convenient Memory Wipe
A major selling point of EBITDA is that it excludes depreciation and amortization, under the argument that these are “non-cash” expenses. This is the financial equivalent of saying that because you don’t physically hand over cash every time your car engine wears down, maintenance costs don’t matter. The truth is, all assets degrade over time, and pretending otherwise is nothing short of financial delusion.
Depreciation represents the inevitable decline in asset value. Companies rely on equipment, real estate, software, and infrastructure to generate revenue, and those assets don’t last forever. Amortization works the same way for intangible assets, such as patents and trademarks. Ignoring these costs might make earnings look better in the short term, but it’s a surefire way to wake up one day and realize your “highly profitable” business is running on a fleet of obsolete, falling-apart assets.
The Grand Illusion of “True Business Performance”
Advocates of EBITDA claim it offers a clearer picture of “true business performance” by stripping away accounting distortions. What they fail to mention is that “true business performance” means nothing if it doesn’t translate into actual cash flow and sustainability. Companies don’t live on theoretical earnings—they survive on real, spendable dollars. EBITDA is an abstraction, a number that can be manipulated to tell whatever story executives or investors want to hear.
Plenty of companies have looked fantastic on an EBITDA basis while being financial disasters in reality. Take WeWork, which once touted its sky-high EBITDA projections while hemorrhaging cash at an unsustainable rate. Or consider the graveyard of private equity acquisitions where EBITDA was used to justify a massive debt load—only for the business to implode when it turned out that profitability was more illusion than substance.
PE Firms and Their EBITDA Obsession – A Love Story
Why Private Equity Worships EBITDA (and You Shouldn’t)
Private equity firms love EBITDA because it makes everything look cheaper, at least on paper. When PE firms evaluate potential acquisitions, they’re often looking at EBITDA multiples rather than net income. Why? Because net income accounts for all the ugly realities of running a business—like interest payments, taxes, and necessary capital expenditures—while EBITDA conveniently ignores them.
If a company’s net income makes it look like a bloated, underperforming mess, EBITDA can give it a fresh coat of financial lipstick. And for a PE firm looking to justify an aggressive valuation, that’s a very useful illusion.
LBOs, Debt, and EBITDA – A Dangerous Cocktail
If EBITDA is PE’s favorite fairy tale, leverage is its magic wand. Leveraged buyouts (LBOs) rely on taking a company’s EBITDA, slapping on a mountain of debt, and convincing lenders that the business can handle it. Since debt payments don’t show up in EBITDA calculations, the numbers still look great—until reality kicks in.
By the time the debt comes due and the company starts struggling under the weight of its obligations, the PE firm has already extracted its profits and moved on. The result? A long line of private equity-owned businesses going bankrupt after being loaded up with unsustainable leverage. Think of it as a financial hot potato—except when the music stops, it’s the employees, customers, and creditors left holding the bag.
The Dirty Tricks of EBITDA – How Companies Fool Investors
Adjusted EBITDA – The Fantasy Version of Profits
When EBITDA alone isn’t enough, companies introduce Adjusted EBITDA, which is essentially the financial world’s version of creative writing. Adjusted EBITDA takes the already misleading concept of EBITDA and adds even more “adjustments,” typically in the form of “one-time” expenses that just so happen to occur every quarter.
Companies will strip out restructuring costs, legal settlements, stock-based compensation, and anything else that makes the numbers look worse. The end result is an earnings metric that bears no resemblance to reality. It’s a wonder we don’t see “Adjusted EBITDA After Executive Bonuses and Private Jet Expenses” included in investor presentations.
Capital Expenditures – The “Invisible” Cash Drain
One of EBITDA’s biggest failings is that it ignores capital expenditures (CapEx), the actual cash companies need to reinvest in their business. If you think about it, excluding CapEx is like measuring personal savings without accounting for rent or mortgage payments. Sure, you might look rich on paper—until your landlord evicts you.
Any business that requires ongoing investment—factories, technology infrastructure, vehicle fleets, you name it—needs to consider CapEx when assessing financial health. But EBITDA says, “Nah, let’s just pretend none of that matters.” And that’s precisely why so many EBITDA-driven valuations turn out to be wishful thinking at best, catastrophic at worst.
The Harsh Reality – What Actually Matters Beyond EBITDA
Free Cash Flow (FCF) – The Metric That Actually Counts
While EBITDA gets all the attention, Free Cash Flow (FCF) is the real MVP of financial metrics. Unlike EBITDA, FCF actually accounts for the money a company generates after covering operating expenses and necessary investments. If a company’s FCF is weak, no amount of EBITDA wizardry will save it from running out of cash.
Debt, Liquidity, and Sustainable Profits – The Real Picture
If you really want to understand a company’s health, look at its debt levels, liquidity, and sustainable net income. EBITDA might tell you how much a company theoretically makes, but if that company is drowning in debt, it won’t matter. Cash flow is king, and no amount of EBITDA adjustments can change that fundamental truth.
EBITDA Is Not Your Friend
EBITDA is a useful tool—for financial illusionists. While it can provide a rough snapshot of a business, relying on it too heavily is like trusting a magician to balance your checkbook. Investors, lenders, and executives who take EBITDA at face value do so at their own risk. If you want to know whether a business is truly profitable, look beyond EBITDA. Follow the cash. Because when the EBITDA fairy tale ends, reality has a way of catching up—fast.
