EBITDA - definition

**blast_investor** Sat Dec 17, 2005 3:44 am

EBITDA - definition
Earnings Before Interest, Taxes, Depreciation, and Amortization - EBITDA

An indicator of a company's financial performance which is calculated as follows:

= Revenue - Expenses (excluding tax, interest, depreciation and amortization)

EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.

EBITDA first came into common use with leveraged buyouts in the '80s, where it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector, even when it isn't warranted.

A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.

**jianyunli** Fri Dec 30, 2005 11:34 am

Re: EBITDA - definition
blast_investor wrote:

EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant.

Blast, I got question about this, as shown in formula, EBITDA is operating income + interests+taxes+deprecation+amortation, the capital expenses should be already in the formula

and what does it mean it didn't reflect working capital changes?

**blast_investor** Fri Dec 30, 2005 1:33 pm

Re: EBITDA - definition
See
http://value-investing-forum.com/viewtopic.php?t=679

working capital affects cash flow, but it does not change EBITDA.

EBITDA is more popular, almost most popular valuation metrics in Wall Street. Cash flow actually is more important than EBITDA even though investors pay less attention to it.

jianyunli wrote:
and what does it mean it didn't reflect working capital changes?