EBITDA

What Is EBITDA?

The acronym stands for earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s a measure of a company’s operating performance.

The calculation is an important assessment of a business’s core operations before capital structure, leverage, and non-cash items like depreciation are considered. If a company does not appear to be profitable when evaluated by other measures such as free cash flow or operating income, analysts use EBITDA to determine if the problem is something outside the scope of the core operation of the business.

Breaking Down EBITDA

EBITDA = Operating Profit + Depreciation Expense + Amortization Expense

(In the equation above, Operating Profit already excludes interest and taxes)

Excluding these components from earnings allows an analyst to focus on the core business. Companies in the same industry can have very different interest expenses depending on the way financing has been achieved.

Since a company’s finance structure is not a part of its core operation it is not included within the EBITDA calculation. This makes targeting the core operation of the company easier and more efficient.

Taxes paid by companies to operate in a particular country or region can also vary greatly. Although tax expenses have an impact on the bottom line, removing these expenses from EBITDA brings the profitability of each company into sharper focus.

What are Depreciation and Amortization

Depreciation and amortization (D&A) are a function of decisions made in the past by company management, which is not important when assessing the health of the company’s current operation. Depreciation of a company’s tangible fixed assets, e.g., buildings, vehicles, etc. is unavoidable due to wear and tear, but these calculations can be inconsistent depending on the methods used to make them. The same is true for amortization expenses, like patents, which are intangible assets.

Finding EBITDA Information on Investing.com

Individual stock pages at Investing.com all contain extensive financial data for the company under the Financials tab on the main stock page. For example, calculating the EBITDA for, Alphabet (NASDAQ:GOOGL) can be done by looking for the components of the equation above, which are all available for quarterly and annual periods.

EBITDA should be used with caution: some investors feel that a company’s operating acumen is not important if the rest of the business is structured poorly. This is akin to an expensive house built on sand; it is less valuable if it is doomed by a fatal flaw.