Understanding EBITDA in Depth: How Smart Investors Use It to Make Investment Decisions

Understanding What EBITDA Really Is

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization or simply put, “gross profit or operating profit before deducting interest, taxes, depreciation, and amortization expenses.”

This figure is popular among growing companies such as Tesla, SEA Group, and various startups that want to demonstrate their true revenue-generating capacity, even if they haven’t yet achieved net profit.

Why Warren Buffett and Many Investors View Warnings

Warren Buffett does not dismiss EBITDA entirely, but he points out a significant limitation: this figure cannot reflect the true profit potential of a company because it ignores interest payments, taxes, and asset-related expenses (depreciation).

Many investors learn that EBITDA should be used as an additional indicator, not as the primary decision-making figure.

How EBITDA Is Important for Investment

EBITDA helps investors understand the true operating profitability by eliminating the effects of financial policies, taxes, and accounting policies, which vary between companies and countries.

When comparing companies within the same industry, a higher EBITDA indicates better management efficiency.

However, keep in mind that EBITDA can be much higher than net income because it excludes certain expenses, and companies that are overall unprofitable can still have positive EBITDA.

Formula and Example Calculation of EBITDA

Basic formula: EBITDA = Profit Before Income Tax + Financial Expenses + Depreciation + Amortization

or

EBITDA = EBIT + Depreciation + Amortization

Real calculation example from THAI PRESIDENT FOODS (year 2020):

First, gather figures from financial statements:

• Profit before income tax: 5,997,820,107 THB
• Financial expenses: 2,831,397 THB
• Depreciation: 1,207,201,652 THB
• Amortization: 8,860,374 THB

Calculate: EBITDA = 5,997,820,107 + 2,831,397 + 1,207,201,652 + 8,860,374 = 7,216,713,530 THB

Where to Check EBITDA Values

Most of the time, EBITDA does not appear in standard financial statements, but some companies compile it in annual reports, such as MINOR INTERNATIONAL.

If not found, you can calculate it yourself from financial statement figures using the above formula, as all data is available in the financial reports.

How to Use EBITDA for Investment Benefits

1. Assess Debt Servicing Ability
EBITDA is used to calculate the debt risk ratio (Debt to EBITDA Ratio), indicating how many years it would take to pay off debt with operating profits. A lower ratio suggests less risk.

2. Compare Companies in the Same Sector
EBITDA provides a clear picture for comparing operational efficiency by removing the effects of different financial and tax policies.

3. Use for Short-Term Analysis Only
Standard advisors recommend using EBITDA as a metric over 1-2 years because, in the long run, actual depreciation costs will impact profitability.

How EBITDA Margin Indicates Importance

EBITDA Margin = (EBITDA ÷ Total Revenue) × 100

This indicator shows what percentage of total revenue is from operating profit.

A good EBITDA Margin should be above 10%. As this percentage increases, it indicates better cost management and lower financial risk.

Difference Between EBITDA and Operating Income

EBITDA does not subtract all expenses, whereas Operating Income deducts operating costs, making Operating Income usually lower than EBITDA.

Cautions for Investors When Using EBITDA

Adjustable Figures

EBITDA can be manipulated by adding back expenses; some companies may adjust figures to appear more favorable than reality.

Does Not Reflect Liquidity

EBITDA ignores debt payments, financial expenses, and cash expenses, which are critical for a company’s survival.

May Hide True Problems

A company with high EBITDA but high financial expenses or poor liquidity may seem stable but could carry high risks.

Does Not Reflect All Costs

Expenses like depreciation are real costs that the company must bear; ignoring them can lead to overestimating company value.

Summarizing Smart Use of EBITDA

EBITDA is a useful tool but should not be the sole metric for investment decisions. As Warren Buffett states, this indicator does not show the full picture of financial health.

Good ways to use EBITDA:

• Use alongside other indicators like Net Income, Cash Flow, Debt Ratio
• Focus on short-term (1-2 years) assessments rather than long-term
• Compare within the same industry only
• Check profit quality by comparing with actual cash flows

Knowing how to properly use EBITDA will help investors make informed decisions and reduce risks.