What Is EBITDA? (and why it matters in interviews)

Free sample from the Deskcraft question bank

EBITDA is one of the most-tested concepts in investment banking interviews: what it is, how it differs from EBIT and cash flow, and why the EV/EBITDA multiple is used. Real questions from the Deskcraft bank, with model answers.

1. Walk me from revenue to net income.

Model answer

Revenue minus COGS is gross profit; minus operating expenses (SG&A, R&D, D&A) is EBIT/operating income; minus net interest and other non-operating items is pre-tax income; minus taxes is net income. Below that, subtract minority interest and preferred dividends to get net income available to common.

2. Walk me through the three financial statements and how they connect.

Model answer

The income statement shows profitability over a period, ending in net income. The cash flow statement starts from net income, adds back non-cash items (D&A, SBC), adjusts for changes in working capital, then shows investing and financing flows to reach the change in cash. The balance sheet is a point-in-time snapshot: net income flows into retained earnings, the ending cash from the CFS becomes cash on the BS, and PP&E links via capex and depreciation. Assets = liabilities + equity must always hold.

3. What are the three financial statements and what does each show?

Model answer

The income statement shows profitability over a period (revenue down to net income). The balance sheet shows financial position at a point in time (assets = liabilities + equity). The cash flow statement shows actual cash movement over a period across operating, investing and financing, reconciling net income to the change in cash. They link: net income flows to the CFS and to retained earnings, and ending cash on the CFS is the cash line on the BS.

4. What is the difference between gross profit, EBITDA, EBIT and net income?

Model answer

Gross profit = revenue − COGS: production profitability. EBITDA adds back D&A to EBIT: a proxy for operating cash generation, capital-structure and tax neutral. EBIT = operating profit after all operating costs including D&A. Net income is the bottom line after interest and taxes — belongs to equity holders. Each suits different comparisons: EBITDA/EBIT for cross-company operations, net income for equity metrics like P/E.