Financial Dictionary -> Investing -> EBITDA

EBITDA is the abbreviation of Earnings Before Interest, Taxes, Depreciation and Amortization. This refers to a method of measuring a business's financial performance. The full calculation is:

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

EBITDA is often used to study and evaluate profit and performance against the competition and similar industries. It is affective because it ignores things like depreciation and other financial conclusions, by looking at the raw revenue and expenses.

Despite this EBITDA is not a credited calculation by the Generally Accepted Accounting Principles (GAAP), because it is easy to include only some revenues and expenses. In other words it can be calculated how a business wants to do it, leaving it open for bias, and there is nothing stopping a company including one item in one quarter and another in the next to make it look better; there is no consistency.

EBITDA does not represent cash earnings. It is a good evaluation of profits and is often used in the accounting as a method to 'window dress' the earnings, so they can be touted in a positive press release. This is not illegal, but can be deemed unethical.

The EBITDA measure is of high interest to a company's creditors and banks. It is basically the income that a business has free for repayment of loans and other debt. In fact when it first started being used in the 1980's, it was applied solely to demonstrate a company's ability to pay off debt.