EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortisation
Profit before the four things that make companies look different from one another.
EBITDA strips out interest (how the company is financed), tax (where it is domiciled), and depreciation and amortisation (non-cash charges for assets wearing out). What is left is meant to approximate the raw earning power of the operating business.
It became popular because it lets you compare a debt-laden company in one country with a debt-free one in another. It is also popular because it always makes a company look better than net income does, which is the less flattering reason.
The deep criticism, made most memorably by Charlie Munger, is that depreciation is a real cost. Machines genuinely do wear out and genuinely must be replaced. Pretending otherwise does not make the cash requirement go away, it just moves it somewhere you are not looking.
EBITDA = Net income + Interest + Tax + Depreciation + AmortisationThe divergence that precedes most disasters
Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.
It is the default metric in takeovers and debt covenants, so you will meet it constantly. Knowing what it excludes tells you what someone might be hiding.
Treating EBITDA as cash flow. A capital-intensive business can have wonderful EBITDA and produce no free cash at all, because every pound of it goes back into replacing equipment.
Related terms
See EBITDA on a real company
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