What is EBITDA really? Warren Buffett doesn't like it, but investors need to know

Consultation on investment matters and the term EBITDA will often come up. However, many companies manipulate this figure to create a more favorable image than reality. The question is, is EBITDA right or wrong? Or is it a necessary tool that must be used with caution?

Understanding EBITDA - The Consulted Number

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization, or in Thai, “Profit before interest, tax, depreciation, and amortization.”

Simply put, EBITDA is a measure of a company’s profit from operations, before deducting expenses related to capital, accounting, and taxes. For this reason, companies like Tesla, SEA Group, and rapidly growing startups often use this figure to showcase their revenue-generating potential.

Why does Warren Buffett disagree with EBITDA?

The investment guru, Warren Buffett, has criticized EBITDA for not truly reflecting a company’s capabilities because it excludes real and necessary expenses such as interest, taxes, repairs, and asset improvements.

From Buffett’s perspective, leaving these figures out of calculations is akin to generating meaningless liquidity and debt-paying ability figures.

How important is EBITDA to investors?

Despite Buffett’s ongoing criticism, many still find EBITDA valuable because it allows comparison of the strength of different companies within the same industry.

For example, if Company A has a higher EBITDA than Company B, it indicates that A has better operational profit-generating ability than B, without considering debt or tax policies.

But with a caveat: EBITDA can be higher than “net profit,” and a company can have positive EBITDA even if it ultimately goes bankrupt because this figure does not account for various expenses.

How to calculate EBITDA correctly

Calculating EBITDA is simpler than you might think, with two basic formulas:

Formula 1: EBITDA = Profit before income tax + Financial costs + Depreciation + Amortization

Formula 2: EBITDA = EBIT + Depreciation + Amortization

Real-world calculation example

Let’s look at an example with Thai President Foods from their 2020 financial statements:

Values needed:

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

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

And that’s how you get the company’s EBITDA.

Where to find a company’s EBITDA

Generally, EBITDA is not highlighted in a company’s regular financial statements. However, some companies include it in their “Annual Reports,” such as MINOR INTERNATIONAL.

If the company you’re interested in does not display EBITDA, that’s okay. Investors can calculate it themselves using the above formulas based on quarterly or annual financial data.

How to use EBITDA effectively

EBITDA is most useful for assessing a company’s ability to service debt, by comparing how many times EBITDA exceeds interest payments. (The higher, the better)

It can also be used to compare companies within the same industry to determine which is a more worthwhile investment.

But the downside is: EBITDA can be higher than “net profit,” and a company can have positive EBITDA even if it ultimately goes bankrupt because it does not include all expenses.

EBITDA Margin - A measure of overall efficiency

EBITDA Margin is the ratio of EBITDA to total revenue, used to measure how efficiently a company generates profit.

Formula: EBITDA Margin = (EBITDA ÷ Total Revenue) × 100

Standard: A good EBITDA Margin should be over 10%. The higher, the better, indicating less financial risk and better cost management.

Difference between Operating Income and EBITDA

Operating Income or “Income from Operations” is the profit remaining after deducting all operating expenses.

Formula: Operating Income = (Net Income - Cost of Goods Sold) - Operating Expenses

Main differences:

In simple terms: EBITDA is removing expenses, Operating Income is accounting for them.

Cautions for investors

Although EBITDA is a useful figure, there are risks to be aware of:

⚠️ EBITDA can be manipulated

Some companies tend to inflate depreciation and amortization to make EBITDA look higher, misleading investors about actual profitability.

⚠️ EBITDA can hide existing problems

Highly leveraged or high-tax companies may show good EBITDA, but their “true” profit might be worse because EBITDA does not include significant expenses.

⚠️ EBITDA does not reflect actual liquidity

Excluding interest, depreciation, and amortization means EBITDA does not show whether the company has enough cash to pay these expenses, which are real obstacles faced by business owners.

Summary: Why you still need to use EBITDA

EBITDA is a useful indicator but not a comprehensive one. When looking at the bigger picture, EBITDA is suitable for comparing similar companies or for short-term analysis (1-2 years)

Warren Buffett’s criticism of EBITDA is valid—this figure does not tell the full story of risk. However, modern investors still need to understand it and know how to interpret it correctly.

Finally: Don’t rely on a single number. Cross-check EBITDA with Net Income, Operating Cash Flow, and other financial ratios to get a clearer picture.