EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization ”” a measure of core operational profitability.
Also: EBITDA
Definition
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric used to evaluate a company's core operational profitability, excluding non-cash charges and capital structure effects. It is calculated as Net Income + Interest + Taxes + Depreciation + Amortization, or alternatively as Operating Income + D&A. EBITDA is widely used in mergers and acquisitions (M&A) for valuation comparisons and in leveraged buyout (LBO) analysis. Critics argue it can obscure poor financial health by excluding capital costs.
Example
“A company with EBITDA of $10M trading at an EV/EBITDA multiple of 8x implies a total enterprise value of $80M, a common M&A valuation shorthand.”
Usage Examples
- 1
“The private equity firm valued the acquisition at 8× EBITDA, implying a purchase price of ₹400 crore.”
- 2
“Investors noted that the company's EBITDA margin had expanded from 18% to 24% despite flat revenue growth.”
When & How to Use
Use EBITDA when comparing the operating profitability of companies across different capital structures, tax jurisdictions, or depreciation policies.
- ▸Valuing a target company in an M&A transaction using EV/EBITDA multiples
- ▸Assessing whether a startup can cover its debt service obligations
- ▸Benchmarking operating margins against industry peers who use different depreciation methods
Etymology & Origin
Acronym: Earnings Before Interest, Taxes, Depreciation, and Amortisation. Entered mainstream financial usage in the 1980s leveraged-buyout boom.
History & Evolution
EBITDA was popularised by Wall Street analysts in the 1980s to assess whether cash-strapped cable and telecoms companies could service their debt. It became a standard valuation metric, though Warren Buffett and Charlie Munger have criticised it for obscuring true economic earnings.
Synonyms
- operating cash earnings
- core earnings proxy
- earnings before deductions
Antonyms / Opposites
- net income
- bottom-line earnings
Images
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Related Terms
- income-statement
- enterprise-value
- operating-income
- valuation