EBITDA

Last Updated: Jun 7, 2019

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EBITDA - A company's earnings before interest, taxes, depreciation, and amortization, is an accounting measure calculated using a company's net earnings, before interest expenses, taxes, depreciation and amortization are subtracted, as a proxy for a company's current operating profitability. 

EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization).

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.

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.

EBITDA is a good metric to evaluate profitability, but not cash flow. It leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant.