Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA

AAA

DEFINITION of 'Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA'

An indicator of a company's financial performance which is calculated in the following EBITDA calculation:

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

INVESTOPEDIA EXPLAINS 'Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA'

This is a non-GAAP measure that allows a greater amount of discretion as to 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.

EBITDA first came into common use with leveraged buyouts in 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 of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn't 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 is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.

Understand th EBITDA with practical examples by reading A Clear Look at EBITDA and EBITDA: Challenging the Calculation

VIDEO

RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Earnings Before Interest & Tax ...

    An indicator of a company's profitability, calculated as revenue ...
  3. Takeover

    A corporate action where an acquiring company makes a bid for ...
  4. Net Debt To EBITDA Ratio

    A measurement of leverage, calculated as a company's interest-bearing ...
  5. EBITDA/EV Multiple

    A financial ratio that measures a company's return on investment. ...
  6. Pretax Earnings

    A company's earnings after all operating expenses, including ...
Related Articles
  1. Investing Basics

    What is the difference between interest coverage ratio and TIE?

    Read about the times interest earned, also known as the interest coverage ratio. Find out why this is an important ratio for investors and creditors.
  2. Disposable income is the money a person has left over after all taxes have been paid.
    Investing

    Disposable Income

    Disposable income is the money a person has left over after all taxes have been paid. Other deductions that may affect the amount of disposable income are employment deductions for things like ...
  3. The shorter the payback period, the better the investment is judged to be.
    Investing

    Payback Period

    Payback period is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment. The shorter the payback period, the better the investment is ...
  4. Fundamental Analysis

    What are the difference between gross revenue reporting and net revenue reporting?

    Understand what it means to report revenue as net or gross and which kinds of companies are most likely to use either reporting method.
  5. What is accounts payable?
    Investing

    Accounts Payable

    Accounts payable is the amount of a company's total invoices currently waiting to be paid. These invoices are from vendors for products and services that were recently delivered.
  6. Personal Finance

    How and where is revenue recognized from barter transactions?

    Find out how the IRS requires companies that engage in barter transactions to recognize the revenue from such transactions and record journal entries.
  7. Fundamental Analysis

    How is revenue related to retained earnings?

    Learn what business revenue is and how it relates to retained earnings. See how accountants calculate these key figures and why investors follow them.
  8. Fundamental Analysis

    What are the differences between gains & losses and revenue & expenses?

    Learn how to distinguish between gains, losses, revenues and expenses. Take a look at how accountants record each category on an income statement.
  9. Fundamental Analysis

    What are the differences between gross profit and net income?

    Find out how companies determine gross profits and net income, and how these figures provide quick snapshots of their financial health.
  10. Fundamental Analysis

    What are the differences between gross profit and EBITDA?

    Learn how to distinguish between gross profit and EBITDA figures and where to find the information necessary to calculate each type for a company.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center