EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for operating cash profitability.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a widely used measure of a company's operating profitability before the effects of financing decisions (interest), tax jurisdictions (taxes), and non-cash accounting charges (depreciation and amortization). EBITDA is calculated as net income + interest + taxes + depreciation + amortization, or equivalently as operating income + depreciation + amortization. It is frequently used in valuation (EV/EBITDA ratio) and in debt covenants. Critics argue EBITDA ignores the real cash cost of maintaining assets (capital expenditures) and can be used to flatter weak earnings — leading Warren Buffett to call it 'earnings before all the bad stuff.'
Example
A company reports net income of $50M, interest expense of $20M, income taxes of $25M, depreciation of $30M, and amortization of $10M. EBITDA = $50M + $20M + $25M + $30M + $10M = $135M. The company trades at 8x EV/EBITDA, implying an enterprise value of $1.08 billion.