Reading the accounts
EBITDA
Earnings before interest, tax, depreciation and amortisation — a rough proxy for operating cash generation.
How it works
It strips out financing and accounting choices so you can compare how two businesses actually operate. That neutrality is why lenders and acquirers use it constantly.
It also flatters anything that owns a lot of equipment, which is the standing criticism of it.
Where it misleads people
Depreciation is a real cost that has been paid in advance. Excluding it makes a capital-intensive business look like a software company, and adjusted versions of EBITDA can exclude almost anything management finds inconvenient.
Formula
EBITDA = operating income + depreciation + amortisationRelated terms
- Operating incomeProfit from the core business, before interest and tax.
- Depreciation and amortisationSpreading the cost of a long-lived asset across the years it is used, rather than expensing it at once.
- EV/EBITDAEnterprise value divided by earnings before interest, tax, depreciation and amortisation.
- Free cash flowCash left over after paying for the investment needed to maintain and grow the business.
- Adjusted earningsCompany-defined profit that excludes items management considers unrepresentative.
Mentioned in
More in Reading the accounts
- Earnings growth
- DuPont analysis
- Earnings per share
- Economic profit
- Deferred revenue
- Fixed costs
- Cost of goods sold
- Cash flow statement
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.