EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

Loading the player...

What is 'EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization'

EBITDA - Earnings before interest, taxes, depreciation and amortization is an indicator of a company's financial performance which is calculated in the following manner:

EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization).

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.

If you're interested in learning how to calculate EBITDA using MS Excel we've got it covered.

BREAKING DOWN 'EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization'

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.  To learn more about other key investing concepts, sign up for our Investing Basics newsletter.

RELATED TERMS
  1. EBITDA to sales ratio

    A financial metric used to assess a company's profitability by ...
  2. EBITDA Margin

    A measurement of a company's operating profitability. It is equal ...
  3. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  4. Net Debt To EBITDA Ratio

    A measurement of leverage, calculated as a company's interest-bearing ...
  5. EBITDA To Fixed Charges

    A ratio used to measure a company's ability to incur additional ...
  6. Debt/EBITDA

    A measure of a company's ability to pay off its incurred debt. ...
Related Articles
  1. Investing

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  2. Investing

    Should You Ignore EBITDA?

    EBITDA may get a bad rap in the financial world, but it can actually help investors create an apples-to-apples comparison.
  3. Investing

    Explaining the EBITDA Margin

    EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
  4. Investing

    Free Cash Flow vs EBITDA: Which Should You Analyze?

    FCF and EBITDA are two ways of looking at the earnings of a business. EBITDA might be better for comparison purposes, while FCF is good for valuation.
  5. Investing

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  6. Investing

    EBITDA

    Otherwise known as Earnings Before Interest, Taxes, Depreciation and Amortization. Learn more about this indicator of a company's financial performance.
  7. Investing

    Value Investing: Why Investors Care About Free Cash Flow Over EBITDA

    Examine value investing philosophy and methodology to see why free cash flow is more important than EBITDA in pure intrinsic value calculation.
  8. Investing

    The Three Things Most Good Stocks Have In Common

    Uncover the three things most good stocks have in common: performance, profitability and value.
  9. Investing

    Value Investing Using The Enterprise Multiple

    This simple measure can help investors determine whether a stock is a good deal.
  10. Markets

    What are Earnings?

    The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year.
RELATED FAQS
  1. What are the risks of relying on EBITDA margin data when making an investment?

    Understand the risks of relying on EBITDA margin data when making an investment decision in a company. Learn what the EBITDA ... Read Answer >>
  2. What is the formula for calculating EBITDA?

    Learn about EBITDA and how companies can manipulate this calculation to look more profitable. Read Answer >>
  3. Why is the EBITDA margin considered to be a good indicator of a company's financial ...

    Understand why the EBITDA margin is a good indicator of a company's financial health. Learn why it also has some drawbacks ... Read Answer >>
  4. How do I calculate an EBITDA margin using Excel?

    Learn about the EBITDA profit margin and how to use Microsoft Excel to calculate this profitability metric using data from ... Read Answer >>
  5. What exactly does EBITDA margin tell investors about a company?

    Discover what investors can learn from the EBITDA margin. How does it compare to other profitability ratios and what are ... Read Answer >>
  6. 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 ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center