EBITDA (earnings before interest, taxes, depreciation, and amortization)

Definition

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company's overall financial performance. It is often used as an alternative to net income in evaluating profitability.

5 Must Know Facts For Your Next Test

1. EBITDA focuses on the operating profitability of a company by excluding non-operating expenses like interest and taxes.
2. Depreciation and amortization are also excluded from EBITDA, making it useful for comparing companies with different asset bases.
3. It provides insight into a company's operational efficiency before accounting for capital structure and tax regime.
4. A higher EBITDA indicates better operational performance but does not account for cash flow or profitability after interest, taxes, depreciation, and amortization.
5. Investors use EBITDA to assess the financial health and earning potential of businesses across various industries.

Review Questions

• What does EBITDA exclude that makes it different from net income?
• Why might investors prefer using EBITDA over net income when evaluating a company's performance?
• How can EBITDA be useful when comparing companies with different capital structures?

Related terms

Net Income:

The total profit of a company after all expenses including interest, taxes, depreciation, and amortization have been deducted.

Operating Income:

The profit realized from a business's core operations, excluding deductions of interest and tax.

Cash Flow:

The net amount of cash being transferred into and out of a business, especially important for assessing liquidity.