Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA = EBIT + Depreciation&Amortization


EBITDA is NOT a good proxy for FCFF because it does not incorporate the importance of the

• cash taxes paid by the firm
• depreciation tax shield
• investment in working capital
• investment in fixed capital

EBITDA is NOT a good proxy for FCFE. It lacks:

• after-tax interest costs or other cash flows that shareholders care about (e.g. new borrowing, repayment of debt)

EBITDA is a pre-interest variable, so it is a flow available to all suppliers of capital, not just common shareholders.