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What Is EBITDA?
EBITDA, stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures the ongoing, adjusted operating income of a business, excluding the effects of depreciation and amortization for a given period. EBITDA offers a profitability metric that disregards the sometimes subjective costs associated with tangible assets (depreciation) and intangible assets (amortization). While EBITDA is frequently used as a proxy for cash flow, it’s crucial to remember that EBITDA precedes tax, operating working capital, and capital expenditures (CAPEX). Therefore, even in businesses with minimal asset intensity, it wouldn’t fully represent cash flow.
EBITDA Formula
EBITDA can be calculated in a number of ways:
EBITDA = EBIT (or Operating Profit) + Depreciation + Amortization
EBITDA = Revenue – COGS – Selling, General & Admin Exp + Depreciation + Amortization
EBITDA = Net Income + Interest Expense + Taxes + Depreciation + Amortization
How EBITDA is Used?
In valuation analysis, EBITDA is often used to calculate valuation multiples, providing a quick snapshot of a company’s value relative to its earnings. In leverage analysis, EBITDA is used to assess a company’s ability to service its debt. However, while EBITDA can be a useful measure, it’s important to remember that it doesn’t account for all cash outflows. It excludes taxes, changes in working capital, and capital expenditure (capex), which are all crucial aspects of a company’s cash flow. Therefore, even in businesses with minimal asset intensity, EBITDA should not be seen as a complete proxy for cash flow.
As with any financial metric, EBITDA should be used in conjunction with other measures to provide a comprehensive view of a company’s financial health. It’s a piece of the puzzle, but not the entire picture.