Buffett points out that EBITDA isn't everything. So how should investors use this metric correctly?

Why Do Investment Legends Beware of EBITDA?

The point Warren Buffett criticizes about EBITDA is not without reason. This top-tier investor believes that EBITDA is only part of the picture and can create dangerous illusions if you look at this figure alone. The main reason is that EBITDA excludes interest, depreciation, and amortization expenses, which are real costs that companies face in reality.

However, many analysts and investors still use EBITDA as a key indicator because it can be useful in certain specific situations.

What Is EBITDA Really?

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization, also called “cash flow from operating activities,” which differs from net profit.

To make it easier to understand, think of EBITDA as simply looking at how much cash a business can generate from its core operations, without worrying about debt or taxes that come later.

Large companies that often report EBITDA figures, such as Tesla and SEA Group, are mostly startups or companies in high-growth phases.

How Is EBITDA Useful for Investment Decisions?

A major advantage of using EBITDA is that it allows you to compare the profitability of different companies within the same industry on a neutral basis, because it strips out financial factors and accounting policies that vary.

For example, if Company A has a higher EBITDA than Company B in the same industry, it indicates that A has a better ability to generate operating profit.

Additionally, EBITDA is useful for checking whether a company has enough capacity to pay its debts by looking at the EBITDA-to-interest ratio. A higher ratio is better because it suggests the business has a sufficient “cushion.”

How to Calculate EBITDA

There are two basic methods:

Method 1: EBITDA = Profit Before Income Tax + Interest + Depreciation + Amortization

Method 2: EBITDA = EBIT + Depreciation + Amortization

All this information can be found in the company’s financial statements. Most European and American annual reports already display EBITDA figures. However, some companies (, especially in Thailand ), do not show it, so you need to calculate it yourself.

For example, if a company has:

• Profit before tax: 6 billion THB
• Interest: 2.8 million THB
• Depreciation: 1.2 billion THB
• Amortization: 8.8 million THB

EBITDA = 6,000 + 2.8 + 1,200 + 8.8 ≈ 7,211.6 million THB

What Does EBITDA Margin Tell You?

EBITDA Margin = (EBITDA ÷ Total Revenue) × 100

This indicator shows how many baht out of every 100 baht of revenue become EBITDA.

A good level is 10% or higher. The higher, the better, as it indicates operational efficiency and lower financial risk.

How Is EBITDA Different from Operating Income?

The key points are:

EBITDA = excludes depreciation, amortization, interest, and taxes (, indicating profit before “necessary expenses” ).

Operating Income = deducts all operating expenses (, providing a more realistic picture ).

Operating Income is accepted under GAAP, but EBITDA is not a standard.

Warnings Investors Must Know

1. EBITDA can be manipulated

Because depreciation and amortization are added back, dishonest companies may adjust figures to look better than reality.

2. Does not reflect true liquidity

EBITDA ignores the company’s debt levels. A company might have heavy debt but still show high EBITDA, which can be misleading.

3. A company can have positive EBITDA but still be loss-making

This can happen if depreciation, amortization, and interest are large enough that, despite positive EBITDA, the company is actually losing money.

4. Useful only in the short term

Experts recommend using EBITDA for analysis over 1-2 years only, because in the long run, true depreciation costs will catch up.

How to Use EBITDA Properly

1. Use with other metrics - Free Cash Flow, Net Income, Debt-to-EBITDA ratio
2. Compare within the same industry - because depreciation varies
3. Look at trends - review EBITDA over 3-5 years for increases or decreases
4. Check revenue quality - high EBITDA but declining core business revenue is dangerous

Summary

EBITDA is a useful figure but not everything. Relying solely on it for investment decisions can cause you to miss important warning signs. Warren Buffett and prudent investors still recommend focusing on Net Income and Free Cash Flow as primary indicators.

EBITDA should be used as a supplementary measure to assess whether a business can generate cash from its core operations well. But remember, depreciation, interest, and taxes are real costs that the company must face, so always be cautious!