EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances. EBITDA, however, can be misleading because it strips out the cost of capital investments like property, plant, and equipment.
This metric also excludes expenses associated with debt by adding back interest expense and taxes to earnings. Nonetheless, it is a more precise measure of corporate performance since it is able to show earnings before the influence of accounting and financial deductions.
Formula of EBITDA
EBITDA= Net Income+Interest+Taxes+D+A
where: D=Depreciation A=Amortization
OR
EBITDA= Operating Profit+DE+AE
where: DE=Depreciation expense AE=Amortization expense
EBITDA can be used to analyze and compare profitability among companies and industries, as it eliminates the effects of financing and capital expenditures. EBITDA is often used in valuation ratios and can be compared to enterprise value and revenue. EBITDA does not fall under Generally Accepted Accounting Principles (GAAP) as a measure of financial performance. its calculation can vary from one company to the next.
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