EBITDA is a form of profit. Whenever someone says they made X in profit - you should immediately ask what kind - net income, operating profit, etc. Depending on the business, different definitions of profit can produce wildly different numbers.

It's a generally accepted proxy for cash earnings since it looks at profit and takes out:

- non-operating costs such as interest and tax. These are "non-operating" because they have nothing to do with delivering your service/product.

- non-cash costs such depreciation and amortization.

It is worth noting that EBITDA is non-GAAP, which is to say that it's not an officially recognized accounting term. You won't see it in an audit and if you do there will be a big disclaimer next to it. The term gained popularity in the 80s with the rise of private equity. It's used in debt agreements to approximate how a business will pay back loan principal and interest.

Further to this and dcaranda, EBITDA is used for valuations because it describes the cash flow the business has available to pay various stakeholders before any financial structures are taken into account. There are three people who have a claim on the cash a company generates after paying operating expenses: debt holders, the government, and shareholders. Their claims on the money go roughly in that order, so in other words the shareholders get what's left (directly via dividends or stock buybacks or indirectly via an increase in the equity value) after the debt holders and the man are paid.

The thing is, however, how much you owe the government is affected by how much debt you have (i.e. your financial structure), because the debt interest is deductible. It's largely because of this that EBITDA is the preferred thing to use, as opposed to say earnings or cash flow, because it enables you to compare companies at a fundamental level unaffected by whatever financial structure they might currently have. One of the things PE guys like to do is fiddle with the financial structure (aka load it up with debt ;-), so it's important to understand the value ex whatever impact the current structure might have. But even if that's not your motive, it's a useful measure for the same underlying reasons.

It's also true that EBITDA is a useful number for PE because it tells you the amount of money available to service debt, as dcaranda points out.

>> the money they get, without taking into account the money they spend.

That would be revenue. EBITDA is a way of only accounting for operational expenses a company faces. There's also EBIT, which subtracts the depreciation and amortization.