Calculate EBITDA from net income or directly from revenue and operating expenses.
EBITDA has become the most widely used profitability metric in mergers, acquisitions, and private equity because it strips away factors that differ between companies: how they are financed (interest), their tax jurisdiction (taxes), and their accounting choices for long-lived assets (depreciation and amortization).
When a private equity firm evaluates an acquisition, they use EBITDA because they will likely change all three of those stripped-out factors post-acquisition. They'll use their own financing structure (different interest), potentially relocate or restructure (different taxes), and may apply different D&A policies (different non-cash charges). What they're really buying is the core operating cash generation — which EBITDA approximates.
Businesses are commonly valued as a multiple of EBITDA: "we paid 8x EBITDA" means the enterprise value was 8 times annual EBITDA. Typical multiples range from 5-7x for mature, stable businesses to 15-25x for high-growth technology companies. The EV/EBITDA multiple allows comparison across companies regardless of size, capital structure, or tax situation.
Warren Buffett has famously criticized EBITDA as a misleading metric, particularly because it ignores capital expenditures. For asset-intensive businesses — airlines, manufacturing, telecommunications, real estate — depreciation reflects real economic cost: the assets that generate revenue wear out and must be replaced. Adding back depreciation without acknowledging the replacement capex creates an inflated picture of cash generation.
For asset-light businesses like software companies, where capex is minimal, EBITDA is a much more honest proxy for cash generation. The right response to EBITDA's limitation is to also look at free cash flow (EBITDA minus capex) rather than dismissing EBITDA entirely. In the right context, it remains one of the most useful single-number business metrics available.