Earnings Before Interest, Taxes, Depreciation, and Amortization - EBITDA

What does it mean?
An indicator of a company's financial performance calculated as:

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

EBITDA can be used to analyze the profitability between companies and industries, because it eliminates the effects of financing and accounting decisions.

In Other Words...
A common misconception is that EBITDA represents cash earnings. EBITDA is good metric to evaluate profitability, but not cash flow.

EBITDA first came into common use with leveraged buyouts in the '80s, where 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 technology sector, even when it isn't warranted. Consequently, EBITDA is being used as an accounting gimmick to dress up a company's earnings.

Related Links
The Top 10 Critical Failings Of EBITDA - A great article on where EBITDA works, and where it is deceiving.

Fool.com: The Limits of EBITDA - An article explaining EBITDA and how to interpret it.

Related Terms
Amortization | Core Earnings | Depreciation | Earnings | EBIT | EBITD | EBITDAX | EBT | Enterprise Multiple | EV/EBITDA | Income Tax | Net Income | Takeover

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