EBITDA

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a non-GAAP measure that approximates a company's operating profitability before the effects of capital structure, tax jurisdiction and non-cash charges for long-lived assets.

How it works

The usual build:

EBITDA = net income + interest expense + income taxes + depreciation + amortization

or, equivalently, operating income (EBIT) + depreciation + amortization.

Companies frequently report adjusted EBITDA, which strips out additional items such as stock-based compensation, restructuring costs, acquisition expenses and impairments. Because definitions vary, adjusted EBITDA for two companies is often not comparable. SEC rules require a reconciliation to net income when a company presents it.

EBITDA is the basis for common ratios:

• EV/EBITDA: enterprise value (market cap plus net debt) divided by EBITDA, a valuation multiple that is neutral to capital structure.
• Net debt/EBITDA: a leverage measure used in loan covenants and by credit rating agencies.
• EBITDA margin: EBITDA divided by revenue.

Why it matters for traders

EBITDA is popular for comparing companies with different debt loads and for valuing capital-heavy businesses, buyouts and turnarounds. Its weakness is that it ignores real costs: capital spending to maintain assets, interest that must be paid, taxes and working capital. A company can have positive EBITDA and still burn cash. Compare it with free cash flow, and watch how many add-backs separate reported EBITDA from net income.

Example

Cobalt Ridge Mining (ticker CBRM) reports annual net income of $40 million, interest expense of $30 million, income taxes of $15 million, and depreciation and amortization of $65 million. EBITDA is 40 + 30 + 15 + 65 = $150 million. With net debt of $450 million, net debt/EBITDA is 3.0x.

FAQ

Is EBITDA the same as cash flow?

No. It excludes capital expenditures, interest, taxes and working capital changes, all of which affect cash.

Why do companies use adjusted EBITDA?

To show profitability excluding items they view as non-recurring or non-cash, though definitions vary by company.