EBITDA
AccountingDefinition
Earnings Before Interest, Taxes, Depreciation, and Amortization. Start with a company's profit, then add back those four items. The result is a rough measure of the cash the business generates from its core operations, ignoring how it is financed, taxed, or accounts for aging equipment.
EBITDA is popular because it lets you compare two companies even if one is loaded with debt and the other is not, or if they have different tax rates. The catch: EBITDA is NOT the same as free cash flow. Charlie Munger famously hated it and called it 'bullshit earnings' because it ignores real costs like replacing aging equipment.
EBITDA is popular because it lets you compare two companies even if one is loaded with debt and the other is not, or if they have different tax rates. The catch: EBITDA is NOT the same as free cash flow. Charlie Munger famously hated it and called it 'bullshit earnings' because it ignores real costs like replacing aging equipment.
Formula
EBITDA = Net income + Interest expense + Taxes + Depreciation + Amortization
Example
Company A reports $100M in net income. It paid $30M in interest on debt, $20M in taxes, and took $50M in depreciation and amortization charges. EBITDA = $100M + $30M + $20M + $50M = $200M.