What does it stand for?
Earnings Before Interest, Tax, Depreciation and Amortisation.
What is it?
EBITDA is a measure of performance, used to compare profitability between organisations of the same industry and value a business for sale. Depreciation and Amortisation are added to net income, disregarding interest and tax payments. Non-operating expenses as well as some non-cash expenses are deducted.
This financial performance measure is important as it offers an insight to a company’s operational efficiency, indicating how much cash is potentially available for reinvestment. For investors, this is a key indication to providing investment or not. The EBITDA informs the lenders if the company can afford the capital and interest.
- Shows a clearer and truer reflection of a company’s financial health
- Shows how successfully a business can generate profits
- A quick way to give an analyst an estimate of a companies value
- A useful way to compare companies within and across industries.
- Tax, depreciation, amortisation and interest are absorbed by the company and so should not really be excluded
- Financial realities may be hidden, making the company appear more attractive than what it is
- EBITDA should not be the only thing investors rely on when making financial decisions. A full financial evaluation should be used instead.