What is EBITDA?

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Although it sounds intimidating upon first glance, it is nowhere near as complicated as it looks. Essentially, it is a good indicator of a company's financial performance.

How do you calculate EBITDA?

EBITDA is calculated as shown by the formula below:

EBITDA = Revenues - Expenses

The expenses obviously do not include interest, taxes, depreciation, and amortization.

What is the significance of EBITDA?

EBITDA is used to analyze and compare profitability between industries and companies. One of its most important traits is that it eliminates the effects of accounting and financing decisions, which can greatly skew a company's earnings from quarter to quarter. However, this does allow the company more leeway in choosing the data to use in this calculation.

Watch out for...

EBITDA is commonly quoted by many companies, especially in the tech sector, to hide something in their finances. The companies have discretion as to what goes in EBITDA, so make sure to look at other metrics to make sure that the company you are researching really is a solid buy.