EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of operational profitability.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out the effects of financing decisions (interest), tax jurisdictions (taxes), and accounting choices (depreciation/amortization) to show how much cash a business generates from its core operations.

Why EBITDA Matters

EBITDA is widely used because it allows for apples-to-apples comparison between companies that may have very different capital structures, tax situations, or accounting methods. A company with lots of debt will have high interest expenses that depress net income, but its EBITDA will reflect the true operational strength of the business.

EBITDA Margin

The EBITDA margin (EBITDA ÷ Revenue) shows what percentage of revenue translates into operational profit. High-quality software companies often have EBITDA margins of 30-40%, while retailers might operate at 5-10%. This metric helps you quickly compare the operational efficiency of different businesses.

Limitations

Warren Buffett has famously criticized EBITDA, arguing that depreciation is a real cost and ignoring it gives a misleadingly rosy picture of profitability. Capital-intensive businesses require constant reinvestment, and EBITDA doesn't capture that reality. Always look at EBITDA alongside free cash flow for a complete picture.