| EBITDA |
EBITDA. Earnings before interest, taxes, depreciation, and amortization are commonly shortened to EBITDA. EBITDA reports a company's profits before interest on debt and taxes owed or paid to the government are subtracted.
EBITDA is used to compare the profitability of a company with other companies of the same size in the same industry but which may have different levels of debt or different tax situations.
What Does Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) Mean?
A measurement of a company's financial performance. It is calculated as follows:
EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows for greater discretion in terms of what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.
Investopedia explains Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA came on the scene during the leveraged buyout boom of the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods. EBITDA now is quoted commonly by many companies, especially in the tech sector, even when it is not warranted. A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA often is used as an accounting gimmick to dress up a company's earnings. Investors should not look at EBITDA alone but also look at other performance measures to help identify whether a company is hiding something in its EBITDA results.
Related Terms:
• Amortization
• Depreciation
• Generally Accepted Accounting Principles—GAAP
• Net Income
• Operating Income
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