Run the Numbers — “A CFO Explains the History of EBITDA”
Host: CJ Gustafson
Date: February 2, 2026
Episode Overview
This episode dives deep into the history, meaning, and contemporary uses (and misuses) of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), a financial metric that has moved from being a tool of corporate desperation to a lingua franca for tech, private equity, and now AI companies. CJ Gustafson, with co-host Ben, explains how EBITDA was invented, made famous by John Malone in the cable industry, and how it continues to shape financial narratives today—sometimes stretching credulity to the breaking point.
Key Discussion Points & Insights
1. Origins of EBITDA: Desperation and Innovation
- John Malone’s Cable Tactics (1970s-1980s)
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Malone took over TCI, a regional cable company, and faced huge upfront infrastructure costs and heavy debt loads in a monopoly-like business model.
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Since the company couldn’t pay down principal and often ran close to breaching debt covenants, net income (GAAP) always looked terrible; Wall Street shunned the stock.
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Pivotal Moment: Malone famously bluffed the banks by tossing his office keys on the table, saying, “If you do that, it’s yours to run.” (03:09)
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To counteract the negative perception from traditional metrics, Malone championed cash flow before interest, depreciation, and taxes—later, EBITDA—as the “true” profit.
“He even went so far as to say that net income was an invention of accountants.” —CJ (05:26)
“He basically told GAAP accounting to go and shove it mature.” —CJ (05:35)
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2. What EBITDA Actually Measures
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Malone’s philosophy: Ignore profits on paper. Focus on predictable, strong cash flow (subscriptions), use debt to build infrastructure, shelter cash flow with deductions for interest and depreciation.
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This approach minimizes taxes and keeps funds inside the business for growth and acquisition.
“It was better to pay interest than taxes. And Malone’s playbook made sure he didn’t do much of the latter.” —CJ (13:28)
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Ben analogizes EBITDA to measuring "the true capacity of the engine" before siphoning off fuel for taxes, etc. (04:49)
3. EBITDA Spreads: Private Equity, Leveraged Finance & Beyond
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EBITDA becomes beloved by private equity: It’s a common denominator for valuing highly leveraged acquisition targets—those with lots of debt, but solid operational cash flow.
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“10x EBITDA” becomes shorthand for deal valuation.
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Even software/SaaS companies with minimal “physical stuff” adopt EBITDA to appear sophisticated and appease capital markets.
“A metric born out of capital heavy infrastructure projects is now powering investor decks for cloud native companies slinging APIs and freemium models.” —CJ (15:12)
4. From EBITDA to “Adjusted EBITDA” and Creative Accounting
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The practice of “adjusting” EBITDA becomes rampant, allowing management to add back various “one-off” or “non-recurring” costs, sometimes of questionable legitimacy.
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Colorful real-world adjustments include:
- WeWork’s “community adjusted EBITDA” — adding back nearly all normal operating costs (17:03)
- Horse trailer expenses
- Failed marketing campaigns
- Hurricane-adjusted EBITDA
- Anticipated future layoffs
- Casino tribal distributions
- Even “new cushions for casino slot machines” as a result of, well, less-than-civilized customer behavior (19:04)
“Some use adjusted EBITDA and throw in… management add backs. It can quickly become this get out of jail free card.” —CJ (16:01)
5. Cautionary Voices: Buffett & Munger
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Warren Buffett and Charlie Munger are cited as eternal EBITDA skeptics.
“When we see companies that say, hey, we don’t pay any taxes because we don’t have any earnings for tax purposes, that’s coming very close to a flim flam game.” —Warren Buffett (25:48)
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Particularly, they dislike how depreciation is swept aside, ignoring the real cost of capital equipment that must be replaced.
“Depreciation is as real of an expense as you can possibly get. And we’re ignoring it.” —CJ (26:21)
6. EBITDA Returns with the AI Boom
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AI companies (2020s) are “reawakening the original spirit of EBITDA” with massive up-front investments in hardware, GPUs, custom silicon: heavy capex reminiscent of the cable era.
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These companies use the value of hardware itself—sometimes borrowing against GPUs—as collateral, keeping the EBITDA narrative alive.
“AI companies are now borrowing against their chips... borrowing against their AI chips. Literally using GPUs as collateral to fund their operations.” —CJ (23:17)
7. The Limitations of EBITDA & The “Juiced” Metrics Era
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The hosts compare the ubiquity of EBITDA adjustments to the steroid era in baseball—if everyone’s juicing, it evens the playing field (or does it?).
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Despite rampant manipulation, EBITDA persists because it’s “the least worst” common metric for cross-industry financial comparison.
“EBITDA is in many ways like a democracy. It’s the least worst system of measurement between industries and capital structure.” —CJ (27:04)
“If everyone just juices their metrics in different ways, unfortunately the only fair comparison is to create an equally juiced up field.” —CJ (27:36)
“If everyone’s super, no one will be.” —Ben quoting “The Incredibles” (28:07)
Notable Quotes & Memorable Moments
- 03:09 — Malone’s iconic move: “He took his keys out of his pocket and threw them on the conference room table. And, and he said, if you do that, it's yours to run.”
- 05:26 — “Net income was an invention of accountants.”
- 15:29 — “We're going to adjust the shit out of this.”
- 16:01 — “Management add backs... get out of jail free card.”
- 17:03 — “The business owner's horse trailer... unsuccessful advertising campaign... hurricane adjusted EBITDA... future layoffs.”
- 23:17 — “Some AI companies are now borrowing against their chips. Literally using GPUs as collateral to fund their operations.”
- 25:48 — Buffett: “That’s coming very close to a flim flam game.”
- 26:21 — “Depreciation is as real of an expense as you can possibly get. And we’re ignoring it."
- 27:04 — “EBITDA is in many ways like a democracy... the least worst system of measurement.”
- 28:07 — “If everyone’s super, no one will be.” (“The Incredibles”)
Important Segments & Timestamps
- 00:00–01:02: Opening, why EBITDA matters and industry comments: “bull earnings” (Munger), “very efficient capital structure” (Malone).
- 01:02–06:07: John Malone, TCI, origins and rationale for EBITDA, the cable industry’s unique situation.
- 10:12–13:37: Definition of EBITDA, why it matters for comparing businesses, how it sidesteps differences in capital structure and geography.
- 14:18–17:00: Spread of EBITDA through private equity, leveraged finance, and SaaS; arrival of “adjusted EBITDA.”
- 17:00–19:04: Real-life, sometimes absurd “adjustments” to EBITDA.
- 22:31–24:41: AI companies’ capital needs bringing EBITDA back in vogue.
- 25:39–27:55: Critiques from Warren Buffett/Charlie Munger, depreciation as a “real expense,” comparison to free cash flow.
- 27:55–28:07: Recap and analogy to the “steroid era” in baseball and “The Incredibles.”
Flow and Tone
CJ and Ben bounce between banter and technical explanation. The tone is irreverent, skeptical, and educational—a CFO unafraid to poke fun at financial orthodoxy, while skillfully unpacking why certain metrics take hold and the games companies play with them.
Summary Takeaway
EBITDA, born as a creative workaround in a heavily indebted and capital-intensive industry, has become a nearly universal—if often abused—yardstick for profit and valuation. As tech and AI companies cycle through waves of capital intensity, the metric renews its relevance, but listeners are reminded to always question what’s below the line, and never mistake accounting metrics for real economic value.