EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
It is a financial metric that is used to measure a company’s profitability and operating performance, by excluding the effects of certain non-operating items such as interest expenses, taxes, depreciation, and amortization.
EBITDA is often used as a measure of a company’s cash flow, as it represents the amount of cash that a company generates from its operations. It is also used as a basis for valuing companies, as it can be used to make comparisons between companies in different industries, or with different capital structures.
How EBITDA Is Calculated
EBITDA is calculated by taking a company’s revenue and subtracting operating expenses (such as cost of goods sold and selling, general, and administrative expenses), but before subtracting interest, taxes, depreciation, and amortization.
This results in a metric that gives a clearer picture of a company’s underlying operating performance, as it excludes the effects of financing and accounting decisions.
An example of EBITDA calculation is as follows:
- Revenue: $100 million
- Cost of goods sold (COGS): $50 million
- Selling, general and administrative expenses (SG&A): $20 million
- Depreciation and amortization: $5 million
- Interest expense: $3 million
- Tax expense: $2 million
EBITDA calculation:
Revenue – COGS – SG&A – Depreciation and amortization – Interest expense – Tax expense = EBITDA
$100 million – $50 million – $20 million – $5 million – $3 million – $2 million = $20 million
So, in this example, the company’s EBITDA is $20 million.