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EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization

EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

What is 'EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization'

EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is one indicator of a company's financial performance and is used as a proxy for the earning potential of a business, although doing so has its drawbacks. Further, EBITDA strips out the cost of debt capital and its tax effects by adding back interest and taxes to earnings.

Explaining 'EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization'

Example of EBITDA

A retail company generates $100 million in revenue and incurs $40 million in product cost and $20 million in operating expenses. Depreciation and amortization expense amounts to $10 million, yielding an operating profit of $30 million. The interest expense is $5 million, leading to earnings before taxes of $25 million. With a 20% tax rate, net income equals $20 million after $5 million in taxes are subtracted from pretax income. Using the EBITDA formula, we add operating profit to depreciation and amortization expense to get EBITDA of $40 million ($30 million + $10 million).

The Drawbacks of EBITDA

EBITDA is a non-GAAP measure that allows a greater amount of discretion as to what is and what is not included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.


Further Reading


Beyond earnings: do EBITDA reporting and governance matter for market participants?
www.emerald.com [PDF]
… do EBITDA reporting and governance matter for market participants?", Managerial Finance, Vol … especially earnings before interests, taxes, depreciation, and amortization (EBITDA)[1]. For … defined by accounting standards, potentially misrepresents a firm's economic performance …

EBITDA, EBITA, or EBIT?EBITDA, EBITA, or EBIT?
papers.ssrn.com [PDF]
… do EBITDA reporting and governance matter for market participants?", Managerial Finance, Vol … especially earnings before interests, taxes, depreciation, and amortization (EBITDA)[1]. For … defined by accounting standards, potentially misrepresents a firm's economic performance …

Ebitda/Ebit and cash flow based ICRs: a comparative approach in the agro-food system in ItalyEbitda/Ebit and cash flow based ICRs: a comparative approach in the agro-food system in Italy
journals.muni.cz [PDF]
… do EBITDA reporting and governance matter for market participants?", Managerial Finance, Vol … especially earnings before interests, taxes, depreciation, and amortization (EBITDA)[1]. For … defined by accounting standards, potentially misrepresents a firm's economic performance …

The prevalence and validity of EBITDA as a performance measureThe prevalence and validity of EBITDA as a performance measure
www.cairn.info [PDF]
… do EBITDA reporting and governance matter for market participants?", Managerial Finance, Vol … especially earnings before interests, taxes, depreciation, and amortization (EBITDA)[1]. For … defined by accounting standards, potentially misrepresents a firm's economic performance …

EVA, not EBITDA: A New Financial Paradigm for Private Equity FirmsEVA, not EBITDA: A New Financial Paradigm for Private Equity Firms
onlinelibrary.wiley.com [PDF]
… do EBITDA reporting and governance matter for market participants?", Managerial Finance, Vol … especially earnings before interests, taxes, depreciation, and amortization (EBITDA)[1]. For … defined by accounting standards, potentially misrepresents a firm's economic performance …

The prevalence and validity of EBITDA as a performance measureThe prevalence and validity of EBITDA as a performance measure
papers.ssrn.com [PDF]
… do EBITDA reporting and governance matter for market participants?", Managerial Finance, Vol … especially earnings before interests, taxes, depreciation, and amortization (EBITDA)[1]. For … defined by accounting standards, potentially misrepresents a firm's economic performance …



Q&A About EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization


What are some other ways that companies use to calculate their earnings before interest, taxes, depreciation and amortization?

Companies often change what they include in their calculation from one reporting period to the next.

What is EBITDA?

Earnings before interest, taxes, depreciation and amortization.

How can you calculate EBITDA?

Operating profit + Depreciation & Amortization = 4 million (3 million + 1 million).  EBITDA = 4 million.  

Is this article about EBITDAR or EBIDTA ?

This article is about EBITDA .

If I wanted to find out more information about how companies use EBIDTA , where would I go on the Internet?

You could try searching online at Google with search terms like "Earnings Before Interest Taxes Depreciation And Amortization" or "Earnings Before Interest Taxes Depreciation And Assets".

How is EBITDA used as a proxy for the earning potential of a business?

It's used to gauge the earning potential of a business by stripping out debt costs and tax effects.

Why are there drawbacks to using EBITDA as an indicator of financial performance?

Because it doesn't account for debt cost or tax effects.

Where else might I be able to find additional information on how companies use EBIDTA ?

You could also try looking up articles in your local library or checking out books on accounting from your local bookstore.

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