EBITDA

Definition

EBITDA is a widely used, non-GAAP financial metric that measures a company’s operating performance. It can be calculated as: $EBITDA=EBIT+Depreciation\&Amortization$ Alternatively, starting from Net Income: $EBITDA=NetIncome+Interest+Taxes+D\&A$

Purpose & Common Uses

1. Proxy for Operating Cash Flow: By adding back Depreciation & Amortization (D&A) (major non-cash expenses), EBITDA provides an indicator of cash profitability from core operations before considering financing, taxes, and capital investment.
2. Enhanced Comparability: EBITDA facilitates comparison of core operating profitability across companies by removing variables such as:
   • Capital Structure: Excludes Interest Expense.
   • Tax Jurisdictions/Strategies: Excludes Tax Expense.
   • Asset Age/Depreciation Methods: Excludes Depreciation & Amortization (D&A).
   • This makes it suitable for use in capital structure-neutral Valuation Multiples like EV/EBITDA.

Key Limitations

• Not True Cash Flow: EBITDA is not a substitute for cash flow as it ignores real cash impacts from:
  • Changes in Net Working Capital (NWC).
  • Capital Expenditures (Capex).
  • Actual cash Taxes paid.
• Non-GAAP: Lacks a standardized definition under accounting rules (US GAAP/IFRS), potentially leading to inconsistencies in calculation.
• Potential for Manipulation: Can obscure underlying issues if significant capital investment is required.

---

See also: EBIT, Enterprise Value (EV), Valuation Multiples, Non-Cash Expenses