Definition
EBITDA strips out financing decisions, tax regimes, and non-cash depreciation to approximate cash-generating power. It is widely used in valuation (EV/EBITDA multiples), leveraged buyout analysis, and debt covenant calculations. Critics argue it ignores real costs of capital expenditures and can overstate profitability for asset-heavy businesses.
functions Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
lightbulb Example
Net income is $8M, interest $2M, taxes $3M, D&A $7M. EBITDA = $20M. At an EV/EBITDA multiple of 10x, the implied enterprise value is $200M.
verified_user Key Points
- Most common metric in M&A and LBO valuation
- Eliminates capital structure and tax jurisdiction differences
- Does not account for capital expenditure requirements
- Adjusted EBITDA removes one-time items