EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
Operating profit with depreciation added back — a profit yardstick close to the cash the core business generates.
In plain terms
EBITDA is operating profit with "depreciation" added back. Depreciation books the yearly wearing-out of factories and machines as an expense, but no cash actually goes out that year.
So adding it back gives a profit closer to "the cash the core business generates." The name is short for "earnings before Interest, Taxes, and D&A are subtracted."
What it tells you
It lets you compare the core-business earning power of companies with different debt structures, taxes, and accounting methods on the same yardstick.
It is often used as the raw material for metrics like EV/EBITDA (valuation) or net-debt/EBITDA (debt burden).
Formula
EBITDA = operating profit + depreciation & amortization (D&A) = earnings before interest, taxes, and depreciation are subtracted
What high or low means
A large and steadily growing EBITDA is read as good cash-generating power from the core business.
That said, the ratio to sales (EBITDA margin) or the trend is more meaningful than the absolute amount.
EBITDA subtracts depreciation, so it hides the real cost of companies that must keep pouring money into facilities (telecom, manufacturing, airlines). Do not mistake "EBITDA for cash flow" — a heavy-CapEx company can show good EBITDA while the cash actually left over is small.
Interest and taxes are also left out, so for a heavily indebted company EBITDA can be far from the profit actually in hand. So it is safer to read it together with free cash flow (FCF).
Warren Buffett and his longtime partner Charlie Munger were famously wary of EBITDA. Munger went so far as to quip, "Every time you see the word EBITDA, substitute it with bullshit earnings."
The reason is that EBITDA is computed with depreciation excluded. A company that must endlessly pour money into plant and equipment can look fine on EBITDA alone, hiding its real cash situation. So even when EBITDA looks good, you have to read CapEx and actual free cash flow (FCF) alongside it.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see EBITDA and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.