Looking Beyond EBITDA
EBITDA is one of the first numbers investors look at.
It’s useful. It can help compare businesses, understand operating performance, and provide a starting point for valuation.
But EBITDA is not cash.
And that distinction matters.
A business can have attractive EBITDA and still require significant capital, carry too much debt, consume cash through working capital, or face operational challenges that aren't obvious from the headline number.
That's why I think investors need to look beyond EBITDA.
EBITDA tells you something. It doesn't tell you everything
Imagine two companies generating the same $10 million of EBITDA.
On paper, they might look similar.
But Company A requires $2 million of annual capital expenditures, has significant working-capital requirements, and carries substantial debt.
Company B requires very little ongoing capital, has strong cash conversion, and maintains a healthier balance sheet.
Same EBITDA.
Very different businesses.
That's where the analysis becomes more interesting.
The question isn't simply:
“How much EBITDA does this company generate?”
It's:
“What does it take to turn that EBITDA into sustainable cash flow and long-term value?”
Where does the cash actually go?
One of the most important things investors can examine is what happens after operating earnings.
Capital expenditures can consume significant cash.
Working capital can change dramatically as a company grows.
Interest expense affects what remains for equity holders.
Taxes matter.
Debt maturities matter.
And growth itself can require capital.
A company can report strong earnings while simultaneously needing substantial external funding to support that growth.
That's not necessarily a problem.
It just needs to be understood.
Growth that consumes capital is very different from growth that generates excess cash.
Growth isn't free
This is particularly important when evaluating companies in acquisition or expansion situations.
A business may have a strong historical EBITDA margin and an attractive growth opportunity.
But what happens if pursuing that growth requires:
New facilities
Additional inventory
More employees
Technology investment
Acquisitions
Higher receivables
Additional borrowing
The projected EBITDA may look excellent.
But the capital required to achieve it can materially change the investment outcome.
That's why I like to think about growth in two dimensions:
How much value can the growth create?
and
How much capital will it take to get there?
Both questions matter.
The balance sheet can change the story
EBITDA is often used as a starting point for leverage calculations.
But leverage itself deserves deeper analysis.
Two companies with identical EBITDA can have very different risk profiles depending on their debt levels, interest costs, maturity schedules, covenants, and liquidity.
A business with $10 million of EBITDA and $20 million of debt is not in the same position as one with $10 million of EBITDA and $70 million of debt.
The headline operating metric is the same.
The financial risk isn't.
This is one reason capital structure should be viewed as part of the investment thesis—not simply a financing decision.
Management matters too
Numbers tell you what has happened.
They don't always tell you why.
Was EBITDA growth driven by sustainable demand?
Temporary pricing?
Cost reductions?
Acquisition activity?
A favorable market?
And what happens when those conditions change?
Understanding management becomes critical here.
Strong operators know where the business is making money, where it is losing money, which investments matter, and where capital is being wasted.
That operating perspective can reveal opportunities that aren't immediately visible in a financial statement.
Sometimes the biggest opportunity isn't increasing revenue.
It’s improving how the existing revenue is converted into cash and value.
The real question: what can this business become?
When I look at a private-market opportunity, I don't want to stop at the historical numbers.
I want to understand the potential.
What happens with better operations?
What happens with the right capital structure?
What happens if working capital improves?
What happens if margins expand?
What happens if management executes more effectively?
That's where investing and operating can intersect.
The goal isn't simply to buy EBITDA.
The goal is to understand the business underneath it—and determine whether there is a credible path to creating more value.
EBITDA is a starting point, not the finish line
EBITDA remains a useful metric.
The mistake is treating it as the complete picture.
A business doesn't create value simply because it reports attractive EBITDA.
Value comes from the combination of earnings, cash flow, capital efficiency, balance-sheet strength, management, and the ability to execute.
That's why I believe investors should always ask one question beyond the headline number:
What does it take to turn this EBITDA into real, durable value?
Because the most important number in an investment isn't always the one that gets the most attention.
Sometimes, it's the number underneath it.
John Jezzini
Private Equity | Real Estate | Private Capital
Comments