EBITDA
IntermediateAlso known as: Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA stands for earnings before interest, taxes, depreciation and amortization. It measures a company's profit from operations before financing costs, taxes and non-cash charges for the wearing out of assets. EBITDA starts with operating profit, or EBIT, and adds back depreciation and amortization. Because these are non-cash expenses, EBITDA is often used as a rough indicator of the cash a business's operations generate. For example, a company with EBIT of 8 million, depreciation of 3 million and amortization of 1 million has EBITDA of 12 million. EBITDA is popular for comparing companies, because it removes differences caused by debt levels, tax rates and accounting choices about depreciation. It is widely used in valuation, as in the EV/EBITDA multiple, and in loan agreements, which often limit borrowing to a multiple of EBITDA. It has important limitations. Depreciation reflects a real cost: machinery and buildings eventually have to be replaced. EBITDA also ignores changes in working capital, interest and taxes, which all use real cash. Companies sometimes report "adjusted EBITDA" that excludes further costs, so it is worth checking exactly what has been left out.
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