What does EBITDA stand for? EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
What is EBITDA?
EBITDA is an accounting measure calculated by using a company’s earnings before interest expenses, taxes, depreciation, and amortization are subtracted. EBITDA is commonly used as an alternate measure to quantify a company’s current profitability from operations. It can show how much profit it makes with its current assets and its business operations on the products and services it creates and distributes. EBITDA has become a popular way to look at pure cash flow for a business before any other filters are applied.
While it is common to see on the income statement along with its popularity with corporate accountants and executives, it is still not accepted as part of the Generally Accepted Accounting Principles (GAAP) by the SEC.
The EBITDA formula is calculated by subtracting all expenses except interest, taxes, depreciation, and amortization from net income.
How to calculate EBITDA:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
- Earnings: Is the amount of profit made in a period of time like a quarter or a year.
- Interest: This is the payment of interest made on business loans or credit lines and also the interest payments received from investments. Interest is the net figure of interest income subtracted from interest expense.
- Taxes: What a company pays in total taxes: income taxes, payroll taxes, property taxes, sales taxes, etc. Corporate taxes are required on the federal, state, county, and city levels.
- Depreciation: Depreciation is the amount of write offs over time allowed on tangible assets the company purchased. Depreciation accounts for the diminishing value of physical business assets, and parts of this cost can be written off each year.
- Amortization: Amortization is for intangible assets like intellectual property, patents, royalties, or copyrights. A part of the cost of the asset will be added to accounting statements as long as that asset continues to be productive. Amortization is used to periodically lower the book value of intangible assets over time.
Warren Buffett is not a fan of EBITDA:
“It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.” “We won’t buy into companies where someone’s talking about EBITDA.” – Warren Buffett