EBITDA assumes your machines maintain themselves

EBITDA assumes your machines maintain themselves.

Two cement companies came to market around the same time, both priced at 11 times EBITDA. On paper, identical value. Same industry, same multiple, similar earnings.

One layer down, they were not remotely the same purchase.

The first ran newer plants. Its annual capex to keep everything running sat close to its depreciation, around 30 crore on 100 crore of EBITDA. The second ran older kilns and a stretched logistics fleet. Keeping that machinery alive consumed about 48 crore every year, 1.6 times its depreciation, and that spend was not growth. It was survival.

Strip out what each business must spend just to stand still, and the first earns around 70 crore of sustainable operating profit for every 52 crore of the second. The same 11x label concealed a price gap of roughly a third.

One buyer got what he paid for. The other paid for earnings the kilns quietly eat every year.

Here is the flaw hiding in plain sight. EBITDA adds depreciation back, so an EBITDA multiple treats plant and machinery as if they were free to maintain. For an IT services company, nearly harmless. For cement, steel, infra, textiles, logistics, any business where machines do the earning, it is fiction.

Depreciation there is not an accounting formality. It is the real annual cost of consuming your assets, and a multiple that ignores it flatters exactly the businesses that can least afford flattery.

The discipline is simple. Before valuing or buying a capital-intensive business, pull five years of capex against five years of depreciation. If capex persistently runs ahead, the EBITDA multiple is overstating earning power, look at EV/EBIT, or better, EBITDA minus maintenance capex. And the mirror check, a freshly built plant depreciated aggressively can make EBIT look too harsh. The multiple is never the answer. The reinvestment need behind it is.

EBITDA tells you what a business earns before reality. Capex is the reality.