📘 What is EBITDA?
EBITDA stands for:
Earnings Before Interest, Taxes, Depreciation, and Amortization
📊 Why is EBITDA Important?
EBITDA is a measure of a company’s operating performance. It focuses on the core profitability by removing the effects of:
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Interest (I): Financing cost
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Taxes (T): Government obligations
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Depreciation (D): Non-cash reduction in value of physical assets
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Amortization (A): Non-cash reduction in value of intangible assets
This allows investors or analysts to compare companies without being distracted by differences in capital structure, tax rates, or accounting policies.
🧮 EBITDA Formula
1. From Net Income:
2. From Operating Profit (EBIT):
✅ When Do We Use EBITDA?
Use Case | Why It’s Used |
---|---|
🔍 Comparing companies | Removes variables like financing/taxes |
💸 Evaluating profitability | Focuses on core operations |
📈 Valuation (e.g., EV/EBITDA) | Helps assess company value |
🧾 Loan analysis | Used by banks to assess debt capacity |
📌 Caution: Limitations of EBITDA
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It ignores capital expenditures (cash needed to maintain/upgrade assets).
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It can overstate cash flow because depreciation/amortization are non-cash but represent real costs over time.
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It can be manipulated by managers (e.g., by excluding other real expenses).
🔍 Simple Example:
Let’s say your company has:
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Net Income = $100,000
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Interest = $20,000
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Taxes = $30,000
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Depreciation = $15,000
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Amortization = $5,000
EBITDA =
$100,000 + $20,000 + $30,000 + $15,000 + $5,000 = $170,000