EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a metric used to evaluate a company’s overall financial performance and is used as an alternative to net income in some circumstances. EBITDA represents the result of the company activities, with interest costs and interest earned as well as all depreciation being excluded.
EBITDA can play a key role in a company’s taxation as well as in evaluation by external organizations. It gives information about the profitability of company activities, and for this reason, it is also used to evaluate how creditworthy companies are. Some companies even deploy this key figure to determine managers’ salaries.
EBITDA is also an indication of the status of sales within a company. As depreciation is not included, the key figure does not give any information about the success of a company overall. The expenses of a company naturally also include its depreciation. On the one hand, its assets continuously lose value and have to be replaced; on the other hand, every company also has to invest to respond to changes in its economic environment or to achieve its growth objectives.
EBITDA formula and calculation:
EBITDA = Net Income + Interest + Taxes + D + A
D = Depreciation
A = Amortization
EBITDA = Operating Profit + DE + AE
DE = Depreciation Expense
AE = Amortization Expense