EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization - a measure of operational profitability.
Definition
EBITDA is a financial metric that measures a company's operational performance by excluding non-operating expenses. It provides insight into the core profitability of business operations without the effects of financing decisions, tax environments, and accounting methods.
How to Calculate
Formula 1 (Bottom-up):
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Formula 2 (Top-down):
EBITDA = Revenue - Operating Expenses (excluding D&A)
Real-World Example
SaaS Company Annual Financials:
- • Revenue: $10,000,000
- • Operating expenses: $7,000,000
- • Depreciation & Amortization: $500,000
- • Interest: $200,000
- • Taxes: $400,000
EBITDA = $10M - $6.5M = $3,500,000
(Operating expenses excluding D&A = $7M - $0.5M = $6.5M)
Why It Matters
For Investors
Allows comparison of companies regardless of capital structure or tax situation
For Management
Focuses on operational efficiency and core business performance