abbr.
earnings before interest, taxes, depreciation, and amortization
| Dictionary: EBITDA |
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| Computer Desktop Encyclopedia: EBITDA |
(Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become widely used in high tech and other industries whenever it is desired to disclose more favorable numbers to the public at the moment.
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| Investment Dictionary: Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA |
An indicator of a company's financial performance which is calculated as follows: 
EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.
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EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn't warranted.
A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.
Related Links:
This measure may have its benefits, but it can also present earnings through rose-colored glasses. A Clear Look At EBITDA
Find out the benefits of using EBITDA to analyze profitability and the dangers of using it as a measure of cash flow. EBITDA: The Good, The Bad, And The Ugly
To spot the signs of earnings manipulation, you need to know the different ways companies can inflate their figures. Cooking The Books 101
Break through the clouds to see if these stocks will rocket higher, or crash and burn. Is That Airline Ready For Lift-Off?
| Real Estate Dictionary: Ebitda |
Term used to analyze REITs. Stands for earnings before interest, income taxes, depreciation accounting, amortization of deferred charges, and extraordinary items.
Example: Annie, a security analyst, was interested in learning about the earnings productivity of the real estate owned by a REIT. She wanted to focus her analysis on the real estate itself and didn't want her analysis to become muddled by how much was borrowed, the interest rate paid, or the amount of leverage. Noncash items such as depreciation accounting and amortization of leasing costs were not relevant. So, taking accounting net income as her beginning point, Annie made adjustments to derive EBITDA.
| Abbreviations: EBITDA |
| Meaning | Category |
| Earnings Before I Trick Dumb Auditors | Miscellaneous->Funnies |
| Earnings Before Interest, Taxes, Depreciation, and Amortization | Business->Accounting Business->Stock Exchange |
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| Wikipedia: Earnings before interest, taxes, depreciation and amortization |
| This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (May 2009) |
EBITDA «ee-bit-dah» is the acronym for Earnings before Interest, Taxes, Depreciation, and Amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the Income Statement are reversed out from the bottom line Net Income. It purports to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects, and canceling the effects of different capital structures.
EBITDA differs from the operating cash flow in a cash flow statement primarily by excluding payments for taxes or interest as well as changes in working capital. EBITDA also differs from free cash flow because it excludes cash requirements for replacing capital assets (capex).
EBITDA Margin refers to EBITDA divided by total revenue. EBITDA margin measures the extent to which cash operating expenses use up revenue.
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In the process of purchase, long-life assets will be revalued to market values. Their depreciation and amortization will necessarily be changed.[clarification needed] Control of the business allows the purchaser to move it to a new tax jurisdiction and to refinance its debt.[citation needed]
EBITDA is widely used in loan covenants. The theory is that it measures the cash earnings that can be used to pay interest and repay the principal. Since interest is paid before income tax is calculated, the debtholder can ignore taxes. They are not interested in whether the business can replace its assets when they wear out,therefore can ignore capital amortization and depreciation.
There are two EBITDA metrics used.
The ratios can be customized by reducing Debt by any cash on the balance sheet or by deducting maintenance CapEx from EBITDA to form a measure closer to free cash flow.
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This section is written like a personal reflection or essay and may require cleanup. Please help improve it by rewriting it in an encyclopedic style. (October 2009) |
Public investors' use of EBITDA arose from their perception that accountants' measure of profits, using accrual accounting was manipulated, that a measure of cash earnings would be more reliable.[citation needed]
It is true that PE can use this metric. And it is true the professional analysts using detailed discounted cash flow models should replace non-cash expenses with projected time-weighted payments. But none of that applies to retail investors' reality.[citation needed]
EBITDA does NOT measure cash earnings because it omits all the tax expenses even though a good portion are cash payments. It also fails to correct for other non-cash expenses, e.g. warranty expense, bad debt allowance, inventory write-down, stock options granted.[citation needed]
It does not include the cash flows from changes in working capital. Suppose a business sells all its opening inventory in a year and replaces the same number of units but at a higher price because of inflation. The profits of a company using FIFO inventory valuation will not include that extra cash cost. Suppose the business is expanding and need to stock a larger number of units. That additional cash cost is not in anyone's EBITDA measure.
When using this metric to replace accountant's earnings it presumes to measure an economic profit. But any economic profit must include the cost of capital and the degradation of long-life assets. This metric simply ignores both. Warren Buffett famously asked, "Does management think the tooth fairy pays for capital expenditures?" Depreciation may not be exact but it is the most practical method available. It succeeds in equating the positions of companies using three different ways to finance long-life assets. It can be interpreted as:[citation needed]
When comparing businesses with no profits, their potential to make profit is more important than their Net Loss. Since taxes on losses will be misleading in this context, taxes can be ignored. Capital expenditures and their related debt result in fixed costs. These are of less importance than the variable costs that can be expected to grow with increasing sales volume, in order to cover the fixed costs. So depreciation and interest costs are of less importance. It is likely that an unprofitable business is burning cash (has a negative cash flow), so investors are most concerned with "how long the cash will last before the business must get more financing" (resulting in debt or equity dilution).
EBITDA is not used as a valuation metric in these circumstances. It is a starting point on which future growth is applied and future profitability discounted back to the present. Equity owners only benefit from net profits, after all the expenses are paid.[citation needed]
During the dot com bubble companies promoted their stock by emphasising either EBITDA or pro forma earnings in their financial reports, and explaining away the (often poor) "income" number. This would involve ignoring one-time write-offs, asset impairments and other costs deemed to be non-recurring. Because EBITDA (and its variations) are not measures generally accepted under U.S. GAAP, the U.S. Securities and Exchange Commission requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to net income in order to avoid misleading investors.
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