What is EBITDA and why do bankers use it?
Answer
EBITDA is Earnings Before Interest, Taxes, Depreciation & Amortization — it is EBIT (Operating Income) with D&A added back. Bankers favor it as a rough proxy for operating cash flow because removing interest, taxes, and D&A neutralizes differences in capital structure, jurisdictions, and non-cash accounting. The cleaner comparability makes EBITDA the base for most enterprise-value multiples (EV/EBITDA being the most common).
Why interviewers ask this
EBITDA isolates cash-generating power from capital structure, taxes, and accounting choices, which is why it dominates M&A. But the metric has real flaws: it ignores CapEx (overstating cash generation for capital-intensive businesses), working capital changes, and the cash cost of growth. Warren Buffett famously hates it for these reasons. Bankers still default to it because nothing else has similar cross-industry comparability — but knowing the why-not signals depth.