An acronym that stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is an indicator of a company’s financial performance and profitability. It is calculated by subtracting expenses from revenue without considering taxes, interest, depreciation and amortization. The figure first came into widespread use during the leveraged buyout craze of the 1980s.
Why use EBITDA instead of simply using net income? Many believe that it gives a clearer picture of financial health and allows for easier analysis of company profitability as well as easier comparison to the profitability of other companies. Its original purpose was to quickly determine if companies had sufficient cash flow to repay debt on their long-term assets.
Buyout Investor One: “I’m not sure we should buy this company because it may not be able to repay its debts after restructuring. Have you run the EBITDA yet?”
Buyout Investor Two: “No, but I just noticed that the letters could also spell ‘die, bat!’”