EBITDA

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

It measures a company's pure operating profitability, removing the effect of:

• Interest — depends on financial structure (debt)
• Taxes — depends on tax regime
• Depreciation and amortization — depends on accounting policies and past investments

How is it calculated?

EBITDA = Revenue – Operating costs (excluding depreciation)

Or, starting from net income:

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization

What is it used for?

EBITDA is useful for:

• Comparing different companies — by eliminating differences in financial structure and taxation
• Assessing cash generation capacity — it approximates operating cash flow
• Communicating with banks and investors — it's the most commonly requested metric

Limitations of EBITDA

EBITDA doesn't account for the investments required to maintain the business (replacing equipment, for example). A high EBITDA combined with neglected investments is a warning sign, not a sign of health. It should always be read alongside actual cash flow.