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

What It Is:

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) measures the profitability of a company without taking into account its capital structure, tax rate, or primary non-cash items of most companies, such as depreciation and amortization. Essentially, EBITDA measures the core income that a company earns before it covers its debt payments and pays its income taxes.

How It Works/Example:




EBITDA is calculated based on figures taken from the company’s income statement. For example,

In this example, EBITDA is $300,000 while net income is $100,000.

Why It Matters:

EBITDA provides investment analysts with useful information for evaluating a company’s operating performance and profitability. Disregarding other factors unrelated to operations such as interest expenses, tax rates, or large non-cash items like depreciation and amortization, EBITDA helps minimize variables that are unique from company to company, and allows investors to focus on operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry, or companies operating in different tax brackets.

However, EBITDA can also be deceptive when applied incorrectly, and is especially unsuitable for firms saddled with high debt loads or those subject to frequent upgrades of costly equipment. Furthermore, day trader can also be trumpeted by companies with poor earnings in an effort to "window-dress" their profitability. Notice in the example above that Company XYZ's EBITDA was three times as high as its reported net income.

Also, because EBITDA isn't regulated by GAAP, investors are at the discretion of the company to decide what is, and is not, included in the calculation. There's also the possibility that a company may choose to include different items in their calculation from one reporting period to the next.

Therefore, when analyzing a firm's EBITDA, it is best to do so in conjunction with other factors such as capital expenditures, changes in working capital requirements, debt payments, and, of course, net income.