If dropping “ebitda” into cocktail party conversation makes you feel like a globetrotting financier, there is something you should know. It makes you sound like a MBA twit-clone with a Hermès tie and two brain cells. A fuzzy proxy for cash flow, ebitda (for the uninitiated, earnings before interest, tax, depreciation and amortisation) is the unit that investors and analysts reflexively use to talk about profit. (And what else do they talk about? Property?) It can mislead – but shouldn’t be abandoned.

The elegance of ebitda is that it comes straight off the income statement, and very high up on it where it should be purest. Coming ahead of interest expense, it is capital structure agnostic, and takes out recurring non-cash charges, too. But relying on the income statement alone ignores critical uses of cash that appear elsewhere – capital spending, changes in working capital, deferred revenue. Free cash flow captures these, but requires turning to another page of the financial report and is hard to forecast as it depends on the timing of payments. But in telecoms where capex is massive, in retail where inventories oscillate, or in software where revenue recognition is key, ebitda misses too much.

Manipulation of ebitda is more troubling. Companies like to add back restructuring and other charges – some of which use cash or represent true economic costs. This renders “adjusted” ebitda, a heap of items companies would wish away. As ebitda moves away from cash, it become less useful for creditors, who use it to see if interest payments will be made. And equity investors slap a multiple on adjusted ebitda to get an inflated valuation.

None of this suggests that ebitda should never be used. But it is dangerous when used alone. The wise employ a varied vocabulary, at cocktail parties and elsewhere.