EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization.
This is a metric applied to evaluate a company’s operating performance. It is a capital-structure-neutral metric, which means that it does not account for the ways a company may use debt or equity. Exclusive of taxes and non-cash expenses such as depreciation, it is a useful structure because it normalises a company’s results for easier evaluation.
EBITDA is calculated by adding depreciation and amortization expenses to operating income. It is also calculated by: adding interest, tax, depreciation, and amortization expense back on top of net income.
It is a useful tool in determining a business’s ability to generate cash flow and for giving you a better understanding of a company’s underlying operating result. The EBITDA figure better reflects the profitability of a business and is therefore used to compare similar businesses, or by investors. You can use an EBITDA to compare a business to similar businesses. It lets investors assess corporate profitability net of expenses dependent on financing decisions, tax strategy, and discretionary depreciation schedules.
EBITDA is a valuable metric for comparing companies that are subjected to varying tax treatments and capital expenses or examining them during periods where these may fluctuate. Additionally, it eliminates non-cash expenses like depreciation that may not accurately reflect future capital expenditures. However, using EBITDA incorrectly can have a negative impact on your returns. It shouldn’t used as an exclusive measure of a company’s financial performance, but rather it should be one of many financial tools.
To help you keep up with more financial jargon, we’ve got a “What is…?” section on the Funding Bay website.
