✅ Full Meaning:
EBITDA stands for:
Earnings Before Interest, Taxes, Depreciation, and Amortization
It measures a company’s profitability from its core operations, before considering how it's financed, taxed, or affected by non-cash accounting items.
🧠 Simple Definition:
EBITDA shows how much money a company earns from its regular business activities, excluding the effects of interest payments, tax costs, and depreciation/amortization.
It is often used as an indicator of operational performance and cash-generating ability.
📊 EBITDA Formula:
EBITDA = Net Income
+ Interest
+ Taxes
+ Depreciation
+ Amortization
Or alternatively:
EBITDA = Operating Profit + Depreciation + Amortization
🧮 Example Calculation:
Let’s say a company reports the following in its financial statement:
-
Net Income: $500,000
-
Interest Expense: $100,000
-
Taxes: $150,000
-
Depreciation: $200,000
-
Amortization: $50,000
EBITDA = 500,000 + 100,000 + 150,000 + 200,000 + 50,000 = $1,000,000
So the company has $1 million in earnings from core operations, excluding financing and accounting adjustments.
✅ Why EBITDA Matters:
-
Focuses on core business profitability
-
Removes variables like debt and tax strategies that differ between companies
-
Useful for comparing companies across industries or countries
-
Popular in valuation models and investment analysis
⚠️ Limitations of EBITDA:
-
❌ Ignores capital expenditures (CapEx)
-
❌ Doesn’t reflect actual cash flow
-
❌ Can hide high debt or unsustainable costs
-
❌ Not a GAAP/IFRS metric — may vary in calculation
👥 Who Uses EBITDA?
-
Investors – to evaluate profitability potential
-
Lenders – to assess creditworthiness
-
Business owners – to value the company
-
Analysts – for comparing firms without tax or debt effects
🧠 Summary:
EBITDA is a widely used financial metric that reflects how much profit a company makes from its operations, before interest, taxes, and non-cash expenses. While powerful, it should be used alongside other financial ratios and cash flow analysis to get a full picture.