EBITDA

EBITDA, short for earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income. It’s used to assess a company’s profitability and financial performance.

Increased focus on EBITDA by companies and investors has prompted criticism that it overstates profitability.

\(EBITDA=Net\ Income+Taxes+Interest\ Expense+D\&A\)
or
\(EBITDA=Operating\ Income+D\&A\)
where:
D&A = Depreciation and amortization

By adding interest, taxes, depreciation, and amortization back to net income, EBITDA can be used to track and compare the underlying profitability of companies regardless of their depreciation assumptions or financing choices.

Like earnings, EBITDA is often used in valuation ratios, notably in combination with enterprise value as EV/EBITDA, also known as the enterprise multiple.

EBITDA is widely used in the analysis of asset-intensive industries with a lot of property, plant, and equipment and correspondingly high non-cash depreciation costs. In those sectors, the costs that EBITDA excludes may obscure changes in the underlying profitability—for example, as with energy pipelines.

“References to EBITDA make us shudder,” Berkshire Hathaway Inc. (BRK.A) CEO Warren Buffett has written. According to Buffett, depreciation is a real cost that can’t be ignored and EBITDA is not “a meaningful measure of performance.”