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

Loading the player...
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 FAQS
  1. What external factors can influence EBITDA margins?

    Companies often experience changes in their earnings before interest, taxes, depreciation and amortization (EBITDA) margins ... Read Full Answer >>
  2. Why is EBITDA commonly used as a valuation metric for telecommunications companies?

    Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a popular equity evaluation metric for analyzing ... Read Full Answer >>
  3. What exactly does EBITDA margin tell investors about a company?

    EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA margins provide investors a snapshot ... Read Full Answer >>
  4. What is the difference between cash flow and EBIDTA?

    Analysts use a number of metrics to determine the profitability or liquidity of a company. Earnings before interest, taxes, ... Read Full Answer >>
  5. What is the difference between operating margin and EBITDA

    Operating margin and EBITDA – which stands for "earnings before interest, taxes, depreciation and amortization" – are two ... Read Full Answer >>
  6. What is the difference between interest coverage ratio and TIE?

    There is no substantive difference between the interest coverage ratio and times interest earned (TIE); these are two names ... Read Full Answer >>
  7. What are the difference between gross revenue reporting and net revenue reporting?

    Recognizing and reporting revenue are critical and complex problems for accountants. There are many gray areas in both recognition ... Read Full Answer >>
  8. How and where is revenue recognized from barter transactions?

    Not all transactions of goods or services involve a monetary medium, such as dollars. Sometimes, companies exchange saleable ... Read Full Answer >>
  9. What are the differences between gross profit and EBITDA?

    Gross profit and earnings before interest, taxes, depreciation and amortization, or EBITDA, are accounting calculations used ... Read Full Answer >>
  10. How is revenue related to retained earnings?

    For accountants and investors alike, revenue and retained earnings represent important figures reported by corporations. ... Read Full Answer >>
  11. What are the differences between gains & losses and revenue & expenses?

    Most companies include revenues, gains, expenses and losses in their income statements. Though some of the terms sound similar, ... Read Full Answer >>
  12. What are the differences between gross profit and net income?

    When preparing either an income statement or an income tax return for a business, accountants provide calculations for both ... Read Full Answer >>
  13. Can moving to a higher tax bracket cause me to have a lower net income?

    Many people think that when their income increases by just enough to push them into a higher tax bracket, their overall take-home ... Read Full Answer >>
  14. How do companies calculate revenue?

    Revenue is the amount of money a company receives in exchange for its goods and services. The revenue received by a company ... Read Full Answer >>
  15. What's the difference between EBITDA, EBITDAR and EBITDARM?

    EBITDA, EBITDAR and EBITDARM are analytic indicators commonly used by management to evaluate the financial performance and ... Read Full Answer >>
  16. Is it possible for a company to have a positive cash flow and a negative net income?

    This situation may seem a bit counter-intuitive at first, but it is actually quite common and not too difficult to understand. ... Read Full Answer >>
  17. What is the difference between IAS and GAAP?

    To answer this question, we must first define what IAS and GAAP are, in order to get a better grasp of the function they ... Read Full Answer >>
  18. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Full Answer >>
Related Articles
  1. 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 ...
  2. 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 ...
  3. 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.
  4. Fundamental Analysis

    How To Decode A Company's Earnings Reports

    Read between the lines to decipher a company's true financial condition.
  5. Economics

    Common Size Balance Sheet

    Investopedia explains: A common size balance sheet is a valuable tool for tracking and analyzing the changes and performance of a business over multiple time periods.
  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. Markets

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  8. Investing

    Earnings: Quality Means Everything

    It's quantity that generates all the hype, but there are more meaningful factors that gauge true performance.
  9. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  10. Professionals

    Accounts Receivable

    Accounts Receivable (A/R) is an accounting term used to refer to the money that is owed to a company by its customers.

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!