What does EBITDA stand for? It stands for earnings before interest, taxes, depreciation, and amortization. It is a way of measuring how much a business earns from its everyday operations, before the costs of borrowing, taxes and the wearing down of its equipment and other long term assets are taken out.
Investors, lenders and buyers like it because it makes companies easier to compare. Two shops can run equally well yet show very different profits because one carries more debt or owns older machines. EBITDA strips those differences away to look at the core business. It is useful, but it is not the same as cash, and it is not the bottom line.
Quick facts
Stands for
Earnings before interest, taxes, depreciation, and amortizationType
Acronym, usually said as a wordHow to say it
ee-BIT-dah or ee-bit-DAHUsed in
Earnings reports, loan terms, business sales, valuationsOfficial measure?
No, it is a non-GAAP figureRelated terms
EBIT, net income, operating income, EBITDA margin
What does EBITDA stand for, word by word?
| Letters | Word | Plain meaning |
|---|---|---|
| E | Earnings | Profit, the starting point |
| B | Before | Counted before the items below are subtracted |
| I | Interest | The cost of loans and other debt |
| T | Taxes | Income taxes owed to governments |
| D | Depreciation | The cost of physical assets, like trucks or ovens, spread over their useful life |
| A | Amortization | The same idea for intangible assets, like patents or purchased customer lists |
Interest and taxes depend on how a company is financed and where it operates. Depreciation and amortization are accounting charges that do not take cash out of the bank that year. Leaving all four out gives a rough view of how the operations themselves are doing.
How to calculate EBITDA
There are two common routes, and both should land in the same place:
- From the bottom up: net income + interest + taxes + depreciation + amortization.
- From operating income: operating income (often called EBIT) + depreciation + amortization.
A small bakery's year, in thousands: net income 120, interest 30, taxes 40, depreciation 50, amortization 10. Add them up and EBITDA is 250 thousand. Revenue was 1,000 thousand, so the EBITDA margin is 25 percent.
The margin, EBITDA divided by revenue, lets you compare a small company with a large one. A higher margin means more of each sales dollar is left after running costs.
Where you run into EBITDA
- Earnings reports: public companies often show EBITDA or "adjusted EBITDA" next to their official results.
- Loans: banks may set limits such as debt no higher than a set multiple of EBITDA.
- Buying or selling a business: a price is often discussed as a multiple of EBITDA, such as "six times EBITDA."
- Workplace meetings: managers may be judged on the EBITDA of their unit.
Because the term comes up in so many deals, it often sits beside other finance letters such as ROI and CAGR. The full set is in the business acronyms section.
The limits of EBITDA
EBITDA is popular, but it leaves out real costs. A company still has to pay its interest and taxes, and it still has to replace worn out equipment. A business with heavy debt or aging machines can look healthy on an EBITDA basis and still struggle to pay its bills.
It is also not an official accounting measure. Under GAAP, the US accounting rules, companies report net income, and EBITDA is shown as an extra, non-GAAP figure. Public companies that report it are expected to show how they got from net income to EBITDA. "Adjusted EBITDA" adds back even more items, such as one time costs, and each company may choose its own adjustments.
EBITDA vs EBIT vs net income
- Net income is the true bottom line, after every cost.
- EBIT, earnings before interest and taxes, keeps depreciation and amortization in. It is close to operating income.
- EBITDA goes one step further and adds those two charges back.
- Cash flow tracks money actually coming in and going out, which EBITDA only estimates.
Think of them as layers. Each one removes a few costs so you can look at the business from a slightly different angle.
Saying and writing EBITDA
Most people in finance say it as a word, "ee-BIT-dah," though you will also hear "ee-bit-DAH." It is written in capital letters with no periods. Its first sound is "ee," which calls for "an": "an EBITDA margin," "an EBITDA multiple." Learn more about letter words like this in what is an acronym.
- "Our EBITDA grew faster than revenue this quarter."
- "The lender capped debt at three times EBITDA."
- "Adjusted EBITDA excludes the cost of the move."
Questions people ask
Is EBITDA the same as profit?
No. EBITDA stands for profit before four kinds of costs are taken out. Net income, which counts those costs, is usually much lower.
What is a good EBITDA margin?
It depends on the industry. Software firms often run higher margins than grocery stores or restaurants, so compare a company with others in its own field.
Why do companies use adjusted EBITDA?
They use it to remove costs they see as unusual, like a lawsuit or a move. Because each company chooses what to adjust, readers should check the list of adjustments.
Is EBITDA used for small businesses?
Yes. It often comes up when a small business is sold or applies for a loan, because buyers and lenders use it to compare earning power.
How do you pronounce EBITDA?
The most common way is ee-BIT-dah, said as one word. Some people stress the end, ee-bit-DAH, and both are understood.