EBITDA

📘 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:

  • Interest (I): Financing cost

  • Taxes (T): Government obligations

  • Depreciation (D): Non-cash reduction in value of physical assets

  • 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:

EBITDA = Net Income
+ Interest
+ Taxes
+ Depreciation
+ Amortization

2. From Operating Profit (EBIT):

EBITDA = EBIT (Operating Income)
+ Depreciation
+ Amortization

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

  • It ignores capital expenditures (cash needed to maintain/upgrade assets).

  • It can overstate cash flow because depreciation/amortization are non-cash but represent real costs over time.

  • It can be manipulated by managers (e.g., by excluding other real expenses).


🔍 Simple Example:

Let’s say your company has:

  • Net Income = $100,000

  • Interest = $20,000

  • Taxes = $30,000

  • Depreciation = $15,000

  • Amortization = $5,000

EBITDA =

$100,000 + $20,000 + $30,000 + $15,000 + $5,000 = $170,000