In 30 seconds
- EBITDA is operating income plus depreciation and amortization.
- It's useful for comparing companies in the same industry and for measuring debt with the net debt / EBITDA ratio.
- EV/EBITDA uses it as the denominator because enterprise value also includes debt.
- Its big flaw is that it ignores the investment needed to keep the business going: that's why Buffett and Munger distrust it.
- Whenever you see EBITDA, subtract capex and compare it with operating cash flow.
Introduction
In 2025, Union Pacific, one of the two big railroads in the western United States, posted operating income of $9,846 million and EBITDA of $12,311 million. That same year it spent $3,791 million on track, locomotives and railcars. If all you look at is EBITDA, that bill doesn't exist. Warren Buffett, who owns rival railroad BNSF, has been warning about that blind spot for more than twenty-five years.
Explanation
EBITDA stands for earnings before interest, taxes, depreciation and amortization. In practice, it's operating income with depreciation and amortization added back.
Think of a cab driver. He brings in $60,000 a year and pays 25,000 for gas, insurance and his self-employment tax, which leaves 35,000. That's his EBITDA. But the car cost 30,000 and will last about five years, so every year he "uses up" 6,000 worth of car, even though no money leaves his account. His real operating income is 29,000. If he trusts the 35,000, five years from now he won't have the money for the next cab.
Why strip out each item?
Interest: so that how a company is financed, with a lot of debt or very little, doesn't skew the comparison.
Taxes: because they depend on the country and on one-off tax breaks.
Depreciation and amortization: because they spread over time what was paid for assets bought earlier, and every company does that at its own pace.
Strip those out and EBITDA does three specific jobs. First, comparing operating profitability across companies in the same industry with different structures. Second, measuring debt: net debt divided by EBITDA tells you how many years of EBITDA it would take to pay it off, and it's the leverage ratio lenders use and Kaplio's stock pages show. Third, valuation: the EV/EBITDA multiple divides enterprise value, which includes debt, by EBITDA, so both sides of the ratio describe the whole company and not just the shareholders' slice.
Now for the critique. In his letter to Berkshire shareholders for 2000, Buffett wrote that references to EBITDA made him shudder, and he asked, in so many words, whether managers believed the tooth fairy paid for capital spending. Charlie Munger went further at Berkshire's 2003 annual meeting: he said that whenever you see the word EBITDA, you should read it as fake earnings, though he put it far more bluntly. The argument is simple. Depreciation is the cost of something you already paid for and will have to pay for again. You can get away with ignoring it at a software company. At a railroad, you can't.
Formula
EBITDA = Operating income (EBIT) + Depreciation and amortization
EBITDA = Net income + Taxes + Interest − Other non-operating income + Depreciation and amortization
EBITDA margin = EBITDA / Revenue × 100
Net debt / EBITDA = (Financial debt − Cash) / EBITDA
EV/EBITDA = Enterprise value / EBITDA
Example
Let's work through Union Pacific and the 2025 financial statements it filed with the SEC (millions of dollars):
Step 1: from the top. Operating income of 9,846 in 2025 plus depreciation of 2,465 = EBITDA of 12,311. On revenue of 24,510, the EBITDA margin is 50.2% and the operating margin 40.2%.
Step 2: from the bottom, as a check. Net income of 7,138 in 2025, plus taxes of 2,028, plus interest of 1,309, minus other income of 629, plus depreciation of 2,465. Again, 12,311. Both routes have to land on the same number.
Step 3: debt. At the end of 2025, long-term debt stood at 31,814 and cash at 1,266. Net debt / EBITDA: about 2.5x, below the 3x bar that Kaplio's stock page sets for an industrial company.
Step 4: your turn. In 2025, Union Pacific spent 3,791 on capital expenditure. How much of its EBITDA did that eat up? (Answer: 3,791 / 12,311 ≈ 31%. And notice: it invested 54% more than it depreciated. For a railroad, depreciation falls short of what keeping the network running really costs.)
The table below compares EV/EBITDA for North America's big railroads. Kaplio's stock page doesn't judge that multiple against other companies, but against the company's own historical average. Before you look: do you think Union Pacific trades at a higher multiple of its EBITDA than CSX?
Real-data example
| Company | Ticker | EV/EBITDA |
|---|---|---|
| Union Pacific Corporation | UNP | 14.6 |
| CSX Corporation | CSX | 15.8 |
| Norfolk Southern Corporation | NSC | 16.0 |
| Canadian Pacific Kansas City Ltd. | CP | 14.9 |
How to read it
How to read it
EBITDA in millions tells you nothing on its own. Use it in these three ratios. The thresholds come from the sector guide on Kaplio's stock pages, except the general EBITDA margin bands, which are rough guides:
| What you check | Good | Normal | Weak or expensive |
|---|---|---|---|
| EBITDA margin | Telecom: 30% or more. Media: 20% or more | 15% to 30% in general | Under 15% in general |
| Net debt / EBITDA | Under 1x | 1x to 3x (software, up to 1.5x) | Over 3x (utilities can carry up to 5.5x) |
| EV/EBITDA vs. its own average | Below 90%: cheap | Between 90% and 110% | Above 110%: expensive |
For EV/EBITDA in depth, see the lesson on EV/EBITDA, and for margins, the one on EBITDA margin.
Pitfalls and limitations
- It ignores investment. In asset-heavy businesses, subtract capex. Union Pacific in 2025: 12,311 − 3,791 = $8,520 million.
- It isn't cash. It doesn't take out taxes, interest or the money tied up in receivables and inventory. Union Pacific's operating cash flow in 2025 was $9,290 million, not 12,311.
- "Adjusted" EBITDA. Many companies also add back stock-based compensation or restructuring costs. The more adjustments, the more suspicious you should be.
- Different accounting rules. Under IFRS, the standards used in Europe, store and office leases have been booked as depreciation and interest since 2019, so EBITDA rises without the business changing at all. Compare companies that report under the same rules.
Case in point: WorldCom
In June 2002, the US telecom company WorldCom admitted it had booked roughly $3,800 million of ordinary operating expenses as investment: the fees it paid other carriers to use their networks. Moving that cost into capex pumped up EBITDA and earnings in one stroke. The company went bankrupt a month later. If capex grows much faster than depreciation, ask why.
Practice on Kaplio
Frequently asked questions
Is a 20% EBITDA good?
It depends on the industry. Kaplio's sector guide looks for an EBITDA margin of 20% or more in media and 30% or more in telecom, so 20% is solid in media but short of the bar in telecom. In retail, a single-digit margin can be normal. Always compare with similar companies and with the company's own history.
Is EBITDA the same as gross profit?
No. Gross profit is revenue minus the cost of sales, and it sits near the top of the income statement. EBITDA comes further down: it also subtracts operating expenses such as marketing and administration, and then adds back depreciation and amortization. A company can have a large gross profit and a modest EBITDA.
Is EBITDA the same as net profit?
No. Net profit is what's left after every cost, including interest, taxes, depreciation and amortization. EBITDA adds those four back, so it's usually much higher. Union Pacific's 2025 figures show the gap: net income of $7,138 million against EBITDA of $12,311 million. For dividends and valuation, net income and free cash flow matter more.