Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a measure of a company’s operating performance. It essentially reveals the profit a company generates from its core operations before accounting for the impact of financing decisions, accounting decisions, and tax environments. Calculation commonly involves starting with net income and adding back interest expense, taxes, depreciation, and amortization. Alternatively, it can be derived by subtracting operating expenses (excluding depreciation and amortization) from revenue.
The metric provides a clearer view of a company’s profitability from its core business. It allows for comparisons between companies with differing capital structures, tax rates, and depreciation methods, making it a useful tool for investors and analysts. The measure can help identify potential investment opportunities by revealing how efficiently a company generates profits from its operational activities, irrespective of external factors or accounting practices. Historically, it gained prominence in leveraged buyout transactions as a way to assess a company’s ability to service debt.
