If you’ve spent more than five minutes in a boardroom, a pitch deck, or a financial news feed, you’ve heard the acronym treated like a holy incantation: EBITDA. Multiples are traded on it. CEOs are fired or celebrated because of it. Entire empires are built on its shifting sands. Strip away the jargon, however, and EBITDA may be the most successful marketing campaign in modern finance — designed to showcase the shine while hiding the “check engine” light behind duct tape.
At our firm, we’ve made a conscious choice to look past the mirage and focus on the only thing that truly matters: cash.
To understand EBITDA’s dominance, you have to understand its origins. It wasn’t created by cautious accountants, but by a disruptor. In the 1970s, John Malone — the “Cable Cowboy” — was building cable networks at breakneck speed. Traditional accounting made him look unprofitable because every mile of cable had to be depreciated. His income statement was drenched in red ink.
Rather than change his business model, Malone changed the scoreboard. He pointed investors to Earnings Before Interest, Taxes, Depreciation, and Amortisation - a way of showing what the business could earn before banks, tax authorities, and asset wear-and-tear entered the picture. It was clever, and contextually useful.
The problem is that a temporary workaround became a universal yardstick.
In the 1980s, private equity embraced EBITDA as the fuel for leveraged buyouts. Ignore interest and depreciation, and almost any valuation can be justified. But rust doesn’t care about spreadsheets.
Warren Buffett captured this perfectly when he asked: “Does management think the tooth fairy pays for capital expenditures?” Depreciation is not an accounting illusion; it is the economic reality of assets wearing out. Trucks must be replaced. Servers must be upgraded. Code must be rewritten. Treating depreciation as irrelevant is pretending tomorrow will never arrive.
You may not pay for the truck today, but you will pay for it eventually.
In private credit and asset management, we see the trap repeatedly: companies reporting strong margins and record EBITDA while quietly suffocating. The disconnect usually comes down to three realities.
First, you can’t eat EBITDA. Payroll, rent, and debt service are paid with cash, not “adjusted” numbers. We’ve seen businesses with tens of millions in EBITDA fail because they simply ran out of money.
Second, working capital matters. A company can look profitable while cash is trapped in unpaid invoices or unsold inventory. EBITDA assumes profits are immediately available. In the real world, they rarely are.
Third, interest is no longer optional. For years, cheap money made it easy to ignore borrowing costs. That era is over. Ignoring interest today is like ignoring a hole in the hull because the sails look impressive. If a business can’t afford the cost of its capital, it isn’t sustainable.
EBITDA can be a useful indicator, like a weather forecast. But Free Cash Flow is the ground beneath your feet. In investing, forecasts are optional. Cash is fact.
That is why we look past the mirage — and why, in the end, cash flow is the only truth that matters.