EBITDA

EBITDA takes operating profit and adds back depreciation and amortisation. The result strips out two things at once: how the business is financed, since interest and tax sit below it, and how capital intensive it is, since D&A is removed.

That is exactly why it became the default multiple denominator. It lets you compare two companies with different debt loads, different tax positions and different asset ages on the same basis, which is what a buyer of the whole business cares about.

It is also why it flatters. Adding depreciation back treats replacing worn out assets as free, so a heavy manufacturer looks better against an asset light peer than it should. Charlie Munger's objection, that it means earnings before the costs we would rather not mention, is worth holding on to.

Adjusted EBITDA needs more care still. Every add back, restructuring, transaction costs, share based compensation, is management arguing that a real cost should be ignored, and each one deserves to be tested rather than accepted.