EBITDA

EBITDA strips financing decisions (interest), jurisdiction (taxes), and historical capital spending (depreciation and amortization) out of earnings to approximate the cash a company's operations throw off. It is the standard yardstick in lending covenants and acquisition pricing, and in credit analysis it anchors two key ratios: debt-to-EBITDA (how many years of operating earnings it would take to repay debt) and EBITDA-to-interest coverage.

Its usefulness is also its trap. EBITDA ignores real cash demands: capital expenditure, working capital growth, taxes actually paid, and debt principal. An equipment-heavy contractor can post strong EBITDA while every dollar of it is committed to replacing machines. As the saying goes, companies do not pay invoices with EBITDA — they pay them with cash. Treat EBITDA as a starting point and reconcile it to free cash flow before concluding a customer can service its obligations.

Also watch for "adjusted EBITDA" in customer-provided statements, where management adds back items it deems one-time. Some add-backs are legitimate (a lawsuit settlement); others are recurring costs in costume (annual "restructuring"). When a customer's covenant compliance or credit story depends on adjustments, ask for the reconciliation from reported net income.