Why does Warren Buffett prefer EBIT multiples over EBITDA multiples?

Warren Buffett's preference for EBIT multiples over EBITDA multiples is largely grounded in the fact that EBIT includes the effect of depreciation and amortization while EBITDA does not. Depreciation and amortization are significant non-cash expenses that account for the wear and tear on capital assets over time. Since Buffett and other value-oriented investors often look for businesses that are generating real profits, reflecting these costs provides a more accurate picture of a company's profitability.

When evaluating businesses, especially in capital-intensive industries, taking into account the depreciation helps investors understand how much money is being used to maintain or replace assets essential to operations. This perspective can lead to a better assessment of a company’s overall financial health. EBIT serves as a bridge between operating earnings and net income, allowing for a measurement that takes into account the necessary costs associated with maintaining a business's asset base.

Moreover, the assertion regarding capital expenditures is not correct; EBIT doesn’t directly include them, as EBIT is derived from operating income and does not factor in capital expenditures on a cash basis. The inclusion of interest payments in EBIT does not apply since EBIT is focused on operational performance, excluding financial leverage considerations. Lastly, while EBIT can sometimes be simpler to calculate depending on available data, this simplification does not