Why do we use EBITDA as a proxy in valuation?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
EBITDA approximates operating cash flow and is capital-structure neutral (no interest), depreciation-policy neutral (no D&A), and tax-regime neutral (no taxes). This makes it ideal for comparing companies across different leverage levels, asset ages, and jurisdictions. Limitations: ignores Capex needs, working capital changes, and can be manipulated with lease classification.
WHAT INTERVIEWERS LISTEN FOR
- ✓Capital structure neutrality
- ✓Depreciation policy neutrality
- ✓Tax regime neutrality
- ✓Comparability across companies
- ✓Proxy for operating cash flow
COMMON MISTAKES
- ✗Thinks EBITDA equals cash flow
- ✗Ignores capex and working capital
- ✗Considers EBITDA as valuation metric alone
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