EBITDA

EBITDA — Earnings before interest and taxes, depreciation and amortization

Calculation: EBITDA = Revenue – Operating Expenses + depreciation expense + amortization expense

EBITDA is often compared to cash flow because it adds back to net income two major expense categories that have no impact on cash: A $1000 depreciation charge does not impact your cash account. This adjustment to earnings makes it particularly useful when trying to compare asset heavy industries like manufacturing to the high tech sector. By taking away the large impact that depreciation has on these “heavy” industries you can compare profitability by calculating EBITDA as a percentage of sales. While core profitability can be assessed using EBITDA, the true measure of a company’s financial health – its ability to generate cash is not disclosed by the EBITDA calculation. Cash flow considers much more than just depreciation and amortization; it assesses changes in receivables, inventory, payables, and loans, etc. revealing whether the company is actually selling its products or services to generate cash. EBITDA is a good measure of operational efficiency but its ease of calculation is not reason enough to forego a thorough cash flow analysis.

Related Terms: Earnings – PE Ratio – Earnings Yield – Forward Earnings – Dividend – Dividend Yield