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Earnings Before Interest, Taxes, Depreciation, and Amortization

What is Earnings Before Interest, Taxes, Depreciation, and Amortization?

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is one of a few profit metrics. At its simplest, EBITDA focuses only on operational profitability, ignoring non-cash expenses by adding them back to Net Income.

How to calculate Earnings Before Interest, Taxes, Depreciation, and Amortization

ƒ Sum(Net Profit + Interest +Taxes + Depreciation + Amortization)

Example

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization If a company has: $50 million in Revenue $10 million in Costs of Goods Sold (COGS) $15 million in Operating Expenses $5 million Depreciation and Amortization Expense $2 million in Interest Expense $3 million in Taxes Net Income = 50 - 10 - 15 - 5 - 2 - 3 = $15 million EBITDA = $15 + 2 + 3 + 5= $25M

More about this metric

EBITDA is used by executives as an indicator of a company's financial value and often serves as a proxy for understanding a business’ earning potential. It’s an effective way for founders and investors to compare two similar companies within the same industry. You need to be cautious when using EBITDA as a measure of success because it doesn’t properly account for the cash available to the business.

For example, it does not take into consideration the timing between when costs are incurred in the making of a product and when revenue is generated from its sale. By definition EBITDA ignores the interest and taxes a company must pay as well as the costs associated with depreciation and amortization of past investments.

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