| earnings before interest, taxes, depreciation, and amortization (EBITDA) One popular measure of cash generated from the operation of a company. Financial analysts frequently use EBITDA to evaluate the ability of a company to service its debt obligations. EBITDA is also used as a measure of profitability in valuing a company and in comparing a company's financial performance with other firms. Critics contend EBITDA can be a misleading financial tool, in part because companies have wide discretion in determining the dollar amount of the components used in calculating EBITDA. In addition, EBITDA does not consider the funds a company is likely to require for capital investments. See also cash flow, free cash flow. Case Study Belgian brewer Interbrew NV announced in summer 2001 a deal to purchase Germany's fourth largest brewer, Brauerei Beck & Co. Interbrew was interested in an expanded presence in Germany and Italy, and also in the U.S. market, where Beck's was a major import brand. At the time of the announcement Interbrew's flagship brand, Stella Artois, was a minor player in the U.S. market. Some analysts criticized Interbrew for paying too high a price based on Beck's earnings before interest, taxes, depreciation, and amortization (EBITDA). The DM 3.5 billion ($1.58 billion) price represented 13 times Beck's EBITDA in the most recent fiscal year, substantially more than the 11.3 times EBITDA paid by another firm for the major French brewer Kronenbourg in an earlier deal. |
(pronounced “ee-bit-dah”) Net earnings of a business before deductions for interest, taxes, or depreciation.It often provides the standard for purchase of income-producing properties or going-concern businesses, with buyers and sellers conducting negotiations in terms of multiples of EBITDA, such as an offer to buy at “seven times EBITDA.”
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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