EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of operating profitability that strips out financing decisions (interest), taxes, and non-cash accounting charges (depreciation, amortization).

Formula

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Alternatively: EBITDA = Revenue - Operating Expenses (excluding interest, taxes, D&A)

Example

Apple (AAPL) reports net income of $100 billion. Adding back $5 billion in interest expense, $20 billion in taxes, $10 billion in depreciation, and $2 billion in amortization, EBITDA is $137 billion. This shows the operating profitability before financing and accounting effects.

How to Interpret It

• EBITDA margins: EBITDA as a percentage of revenue shows operational efficiency. Higher margins mean better profitability from core business.
• Comparison across companies: By removing interest (financing decisions) and taxes (jurisdiction-dependent), EBITDA allows comparison of companies with different debt levels or tax situations.
• Comparison across time: EBITDA is less distorted by changes in capital structure, so it's useful for tracking operational trends over years.
• EV/EBITDA ratio: Used to value companies; a lower ratio suggests cheaper valuation.
• Cash flow proxy: EBITDA approximates cash generation (though it's not actual cash flow; add back working capital changes for that).

Limitations

• Not cash: EBITDA adds back depreciation, but that's an accounting charge; it's not actual cash spending. Capex is real cash but not in EBITDA.
• Manipulated easily: Companies can overstate EBITDA by excluding large one-time items (restructuring, writedowns) and calling them "non-recurring."
• Ignores debt burden: Removing interest hides the true cost of debt. A company with high interest payments might have high EBITDA but low net income.
• Capital-intensive businesses: For companies requiring heavy capex, EBITDA can be misleading because capex is not deducted.

Related Terms

• Net Income — bottom-line profit after all expenses
• Operating Income — profit from operations before interest and taxes
• EV/EBITDA — enterprise value divided by EBITDA, a valuation metric
• Free Cash Flow — actual cash available after capex