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EBITDA

Uncategorized Mar 20, 2019

Definition

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. 


Why It's Important

This is one measure you can use to determine a firm's financial performance.  What does this have to do with personal finance?  Well, if you are evaluating investments you would want to invest in companies with strong financial performance.  You would look at a variety of factors including the EBITDA.  

The equation for calculating it looks like this:

EBITDA = Net Income + Interest + Taxes + Depreciation

You are adding back in some values that the net income already took out.  Unfortunately, not all measures are perfect.  If they were, I would be extremely rich by now!  EBITDA does not account for the cost of capital (land, machines, equipment) so it can be a little misleading especially if the business relies on credit a lot to make those purchases.
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When you are conducting research, always make sure you are evaluating the target company in a variety of ways.  Using just one calculation or value can be very misleading and doesn't show the full financial health.

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