EBITDA
EBITDA is a company's earnings before interest, taxes, depreciation and amortization: a measure of its pure operating profitability, without the effect of how it's financed or accounting decisions.
EBITDA stands for "Earnings Before Interest, Taxes, Depreciation and Amortization." It's calculated by starting from operating profit and adding back depreciation and amortization, two accounting entries that don't involve an actual cash outflow. The result measures how much a business generates from its core activity, independent of how it's financed (debt vs. equity) or its tax and depreciation accounting choices, which makes it easier to compare companies in the same sector even if their financing structures differ.
EBITDA doesn't replace net profit: since it doesn't deduct interest, taxes, or depreciation itself, a heavily indebted company can have a healthy EBITDA and still a very small or negative net profit. That's why it's usually used together with other indicators (like P/E or ROE) when analyzing a stock, rather than on its own.
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Frequently asked questions
What does EBITDA stand for?
It's the acronym for "earnings before interest, taxes, depreciation and amortization": a measure of a company's operating profitability before those items.
Why use EBITDA instead of net profit?
Because it lets you compare the profitability of the core business between companies with different financing structures, tax treatment, or depreciation policies, isolating the effect of those differences.
Does a high EBITDA mean a company is profitable?
Not necessarily on its own: a company with a high EBITDA but a lot of debt can still have a low or negative net profit once interest and taxes are deducted, so it's worth looking at alongside other indicators.