EBITDA

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It starts from net income and adds back interest, income taxes and the non-cash charges of depreciation and amortisation, leaving a figure that approximates profit from core operations.

Why it matters

By removing financing choices, tax regimes and accounting write-offs, EBITDA helps compare the operating performance of companies with different debt levels, tax rates or asset bases. It is common in valuations, where a company may be valued as a multiple of EBITDA. It is not a measure defined by accounting standards such as IFRS or GAAP, and it ignores real costs like capital spending and working capital, so it can make heavily invested businesses look better than their cash flow suggests. Definitions and use vary by country.

Example

Net income:        200
+ Interest:         50
+ Taxes:            70
+ Depreciation:     60
+ Amortisation:     20
EBITDA =           400

Common mistakes

• Treating it as cash flow.
• Using "adjusted EBITDA" without checking what was excluded.
• Comparing it across industries with very different capital needs.
• Confusing it with revenue or net profit.

Related

• Gross margin
• Burn rate
• Unit economics
• KPI

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