The Finance Gem 💎 #110: Meet EBITDA's Big Sister

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EBITDA vs. EVA vs. RI

Most executives default to EBITDA because it’s simple and familiar. But simplicity often hides risk. EBITDA doesn’t account for capital costs, leverage, or whether growth actually creates shareholder value.

So let me show the world through a sharper lens—EVA —and RI. These measures go beyond surface-level profitability to show whether your company is truly compounding value, or just reporting numbers that look good on paper.

Here’s what you’ll want to remember in simple terms:

• EBITDA shows accounting profit.

• EVA shows economic profit above all capital costs.

• RI shows economic profit above equity’s required return.

When these metrics are built into planning and reporting, capital allocation decisions change. Boards stop rewarding cosmetic growth and start backing strategies that clear the company’s hurdle rate and drive sustainable enterprise value.

EBITDA is financial comfort food—not performance

It doesn’t show if returns beat the true cost of capital—the minimum hurdle your investors require. For example, a company may report $50M in EBITDA, but if its capital base requires a 12% return and it only generates 8%, value is being destroyed, not created.

That’s why EBITDA should never be treated as proof of value. It’s an operational snapshot, not a measure of whether growth is building—or draining—enterprise value.

EVA shows whether you beat the true cost of capital

Economic Value Added (EVA) asks a simple but decisive question: did the company generate returns above its weighted average cost of capital?

If the answer is no, growth is an illusion. A business can show rising revenue and EBITDA, but if the return on invested capital is 8% while the cost of capital is 10%, every dollar of expansion reduces value instead of building it.

That’s why EVA should be built directly into planning and reporting. It makes clear whether each initiative—an acquisition, a product launch, or a new market entry—creates value over time or simply consumes capital.

When EVA is visible, growth can be judged for what it really is: value-creating or value-destroying.

RI tells you if equity holders are earning a premium

Residual Income (RI) is like an EVA that focuses on equity capital only. After paying the cost of debt and meeting required returns, the question is: is there anything left for shareholders?

Take a division that reports $20M in profit. On EBITDA, it looks strong. But once you charge the shareholder capital it uses— $250M at a 10% required return—it’s actually destroying $5M of equity value a year. RI makes that visible.

That’s why disciplined leaders use RI at the business-unit level. It reveals which parts of the company are truly creating value for shareholders, and which are just consuming capital under the cover of accounting profit.

Capital allocation shifts when EVA and RI are visible

When boards and executives see EVA and RI, decision-making changes. Capital is no longer allocated to projects with attractive EBITDA margins—it’s allocated to opportunities that exceed the company’s hurdle rate and compound enterprise value.

This is how disciplined companies grow their value predictably and sustainably.

Stop repainting the ship. Measure the hull.

Using EBITDA as your primary measure is like repainting a sinking ship. It makes the picture look better, while the fundamentals deteriorate.

Strategic leaders have learned to move past optics and engineer reporting systems that measure actual results against the true cost of capital needed to achieve them.

Companies that grow with confidence don’t stop at EBITDA.

They check if returns beat the true cost of capital, and they keep strategy, finance, and execution working as one system.

That’s exactly what this fall’s cohort of the CEO Financial Intelligence Program is built to deliver—capability, foresight, and the infrastructure to lead before the market or your board forces your hand.

Enrollment closes November 11 or when all spots are filled.

This is the final cohort of the year, so if you want to engineer your future revenue growth, profitability, and valuation, this is your opportunity. You’ll be primed for explosive growth in 2026 while everyone will still be stuck in the 2025 budget.

Secure one of the limited spots today.

Warm regards,
Oana