In plain words: Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA is a measure of how much profit a company generates from its core operations, before certain costs are subtracted. By stripping out interest, taxes, and accounting items like depreciation, it tries to show the underlying earning power of the business itself.
Why do analysts use EBITDA?
Because it removes the effects of financing and tax decisions, EBITDA lets people compare companies of different sizes or in different countries on a more even footing. It is one of several figures used when studying a company's cash flow and overall health, and it often appears in valuation discussions.
What are the limits of EBITDA?
EBITDA is not the same as actual cash a company keeps, because it ignores real costs like interest and equipment wear. A company can show a healthy EBITDA while still struggling. For an investor weighing an individual stock, it is one signal among many, never the whole picture.
Key takeaways
- EBITDA shows operating profit before interest, taxes, depreciation, and amortization.
- It helps compare companies but ignores some very real costs.
- It is one analytical tool among several, not a measure of cash kept.