Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)

Parent term
EBITA is a method used to value a company based on its operating performance without having to factor in financial, accounting or tax decisions

EBITDA Stands For:
Earnings Before Interest Tax Depreciation &  Amortization

  • Used to evaluate a company's operational performance
  • Focuses on operating profitability
  • Ignores capital structure and how the business is taxed
  • Makes it easy to compare companies across an industry, even if they have different capital structures
  • Commonly used in the Private Equity business to value a company
  • Also used in public markets to value companies
  • Considered to be a measure of how much debt a company can handle (debt service capacity)

EBITDA Cautions
  • Don't rely on it as the only valuation metric - have to consider other aspects like future capital/investment needs as well

EBIDTA Criticisms
  • Focuses on earnings instead of cashflow
  • Does not look at quality of earnigs
  • May be deceiving if a company requires significant new or ongoing capital investment
  • Can make companies valuations seem cheaper if there is significant depreciation or amortization
  • The word owes its existence to dishonest money (Anthony Deden said this)