EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of core operating profitability, stripping out financing and accounting decisions.
Example
“Private equity firms typically value companies at 8-12x EBITDA when making acquisition offers.”
Memory Tip
EBITDA = Earnings Before I Take Dollars Away. Strips out the accounting noise.
Why It Matters
EBITDA helps you understand how well a company actually operates by focusing on profits from its core business activities. When evaluating investments or comparing companies, EBITDA strips away financial and accounting decisions so you can see the true operational performance without distraction from debt levels or tax situations.
Common Misconception
Many people think EBITDA is the same as profit or cash flow, but it is not. EBITDA ignores important real costs like interest payments on debt, taxes owed, and the wear and tear on equipment, so a company with high EBITDA can still be unprofitable or have cash flow problems.
In Practice
Suppose Company A reports net income of 5 million dollars but that includes 3 million dollars in interest payments, 1 million dollars in taxes, and 2 million dollars in depreciation. The EBITDA would be 11 million dollars (5 plus 3 plus 1 plus 2), showing much stronger core operations than the net income figure alone would suggest.
Etymology
Acronym coined in the 1980s during leveraged buyout deals to measure operating cash generation.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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