Understanding EBITDA Per Share: Why Investors Can't Use This Metric (and What to Do Instead)

You’ve likely heard financial analysts mention EBITDA when discussing company earnings, yet you might be confused about what it actually represents and why it matters for your investment decisions. More importantly, if you’ve ever wondered why companies don’t report EBITDA per share the way they do with regular earnings per share, there’s a specific regulatory reason—and understanding this distinction will make you a more informed investor.

What EBITDA Really Measures: Earnings Before the Complications

At its core, EBITDA stands for earnings before interest, taxes, depreciation and amortization. Think of it as a streamlined way to assess a company’s operational profitability by removing certain financial and accounting layers that don’t directly reflect day-to-day business performance.

The key insight here is the difference between EBITDA and net income. Net income represents what’s left after accounting for everything—loans, taxes, equipment wear-and-tear, and patent value erosion. EBITDA, by contrast, adds back those items to show what a company earned before those deductions. This creates a cleaner picture of a company’s core operating ability, which is why it’s useful for comparing very different companies or evaluating acquisition targets.

Breaking Down the Five Components That EBITDA Excludes

To understand why EBITDA exists, you need to grasp why companies deliberately exclude these five items:

Earnings form the foundation—the revenue remaining after direct costs like materials and labor. EBITDA then excludes four specific charges:

Interest expenses represent what companies pay to service debt. By removing interest, EBITDA neutralizes the impact of different financing strategies. Company X might borrow heavily for expansion, while Company Y might rely on equity. Their interest expenses would be vastly different, yet their operational efficiency is comparable. EBITDA puts them on equal footing.

Taxes vary dramatically by jurisdiction and corporate structure. Removing them from the calculation eliminates these artificial variations, allowing you to focus on operational results rather than tax planning outcomes.

Depreciation reflects how manufacturing equipment, buildings, and machinery lose value over time. A factory with brand-new machines shows higher depreciation costs than one with older, fully-depreciated equipment. Yet both might generate identical cash flows. EBITDA strips out this timing distortion.

Amortization works similarly but applies to intangible assets like patents, software licenses, and trademarks. A company’s $500,000 patent might be valued at $400,000 five years later, even though no cash left the company. That $100,000 reduction is amortization—and EBITDA excludes it.

The critical detail: depreciation and amortization aren’t cash outflows in the traditional sense. If you purchase equipment for $100,000, the company doesn’t immediately spend that money again. Yet accounting rules require recognizing that the equipment becomes worth $90,000 next year. That $10,000 decrease is depreciation—a non-cash charge that reduces reported earnings while EBITDA ignores it.

Why Companies Prefer EBITDA Over Net Income: A Comparison

Companies emphasize EBITDA when net income tells an unflattering story. Net income is essential for calculating earnings per share and tracking performance against expectations, but EBITDA reveals something different: potential profitability.

Consider this scenario: Company A generates $10 million in revenue. After paying $3 million in materials and labor, plus $1 million in other operating expenses, it has $6 million remaining. It then pays $500,000 in interest on outstanding debt and $1,500,000 in taxes, leaving $4 million in net income. But Company A also has $1 million in depreciation from its heavy equipment investment.

Company B also generates $10 million in revenue with identical $4 million in operating costs, arriving at $6 million available. However, Company B pays $1,500,000 in taxes and has $500,000 in amortization from acquired intellectual property. It has zero interest expense and zero depreciation. Net income: also $4 million.

At first glance, both companies appear identical (both $4 million net income). But EBITDA reveals their actual operational power. Company A’s EBITDA is $9 million ($4 million net income plus $500,000 interest plus $1,500,000 taxes plus $1 million depreciation). Company B’s EBITDA is $8 million ($4 million net income plus $1,500,000 taxes plus $500,000 amortization).

What does this difference mean? Company A carries debt ($500,000 annual interest payments), while Company B doesn’t. Company A has recently invested in fixed assets (hence the high depreciation), while Company B’s intellectual property is more mature. If you were considering acquiring one of these companies, EBITDA reveals these operational nuances that net income masks. Suddenly, the $1 million EBITDA gap becomes meaningful context for your decision.

The EBITDA Per Share Prohibition: What SEC Rules Really Say

Here’s where regulatory requirements intersect with investor confusion: the Securities and Exchange Commission explicitly prohibits companies from reporting EBITDA per share.

This rule exists because EBITDA is not a Generally Accepted Accounting Principle (GAAP) measure. When companies release earnings, they must provide GAAP-compliant financial statements—balance sheets, cash flow statements, and income statements. If companies were permitted to report EBITDA per share alongside or instead of actual earnings per share, investors might prioritize the non-GAAP metric without understanding its limitations.

Think about what this restriction means. You’ll see a company report “net income of $2 per share,” but you’ll never officially see them claim “EBITDA of $3 per share”—even if that calculation is mathematically possible. This isn’t arbitrary; the SEC is protecting investors from relying too heavily on a metric that excludes real business costs.

Companies can certainly calculate EBITDA and discuss it in conference calls, presentations, and investor relations materials. However, the official per-share metric they must use is earnings per share, derived from net income. This distinction is crucial for maintaining consistency across financial reporting and ensuring investors focus on GAAP-compliant metrics for direct share-by-share comparisons.

Real-World Example: Why Two Companies Can Look Different Through EBITDA

Let’s extend our Company A and Company B scenario to illustrate why apples-to-apples comparison requires digging beyond surface numbers.

If you were evaluating these companies purely on EBITDA, Company A ($9 million) appears superior to Company B ($8 million). But a deeper analysis reveals:

Company A carries $500,000 in annual interest payments, suggesting it financed its recent equipment purchases through debt. Company B financed its intellectual property acquisitions differently, likely through equity or cash. These financing decisions don’t reflect operational efficiency—they reflect capital structure choices.

Company A’s equipment is relatively new (evidenced by $1 million annual depreciation), meaning it should deliver reliable performance for years. Company B’s intellectual property is aging (only $500,000 amortization), suggesting it may need refreshing or faces approaching patent expiration.

Neither observation makes one company “better”—they’re simply different. But recognizing these patterns helps you understand whether EBITDA differences reflect true operational divergence or merely different balance sheet compositions.

This is why serious investors look beyond the single EBITDA number. They examine the composition of that EBITDA. They cross-reference depreciation trends, interest expense histories, and tax strategies. They understand that two companies with identical EBITDA might present radically different acquisition risks or growth opportunities.

What the Investment Legends Actually Think About EBITDA

Warren Buffett, widely regarded as the world’s most successful investor, famously dismissed EBITDA’s utility. In correspondence to Berkshire Hathaway shareholders, he quipped that references to EBITDA “make us shudder—does management think the tooth fairy pays for capital expenditures?”

His criticism cuts to the heart of EBITDA’s limitation: it ignores real costs. Depreciation and amortization represent genuine asset depletion. Equipment deteriorates. Patents expire. These aren’t phantom charges—they represent actual value destruction that future capital expenditures must eventually offset. By excluding these costs, EBITDA can paint an artificially rosy picture.

Yet the analytical community remains divided. Some professionals argue that because depreciation and amortization don’t represent cash outflows in the period they’re recognized, they should be added back for true operational comparison. Others counter that asset devaluation is precisely why companies must reinvest capital—a real economic burden that belongs in profitability calculations.

The SEC’s prohibition on EBITDA per share effectively resolves this debate for regulatory purposes. While EBITDA remains useful for certain analytical contexts—particularly mergers and acquisitions where asset structure varies significantly—earnings per share remains the legally mandated metric for measuring per-share performance. This regulatory framework reflects a judgment that comparing companies on a GAAP basis protects investors better than allowing divergent EBITDA calculations.

Making EBITDA Work for Your Investment Analysis

EBITDA serves a legitimate analytical purpose, particularly when evaluating companies with vastly different asset bases, financing structures, or tax jurisdictions. Manufacturing-heavy firms benefit from EBITDA analysis because equipment depreciation can distort their earnings. Similarly, recently acquired companies with substantial amortization from goodwill appear artificially unprofitable under net income but might reveal operational strength through EBITDA.

However, remember three critical limitations. First, EBITDA per share isn’t an allowed reporting metric for good reason—it could mislead you into ignoring genuine costs. Second, EBITDA doesn’t measure cash flow; high EBITDA can coexist with negative cash generation if capital needs are substantial. Third, EBITDA variations between companies often reflect financing and structural choices rather than operational superiority.

Use EBITDA as one analytical tool alongside net income, cash flow statements, and balance sheet evaluation. Don’t anchor your investment decisions to EBITDA alone. Understand what it reveals—operational earning power—and equally important, what it obscures: real financing costs, tax positions, and capital requirements. When you approach EBITDA with this balanced perspective, you’ll make more sophisticated investment decisions grounded in complete financial reality rather than simplified metrics.