EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization. It is a measure of a company’s operating profitability, also known as its cash flow from operations.

Formula:

EBITDA = Earnings Before Interest Taxes – Interest Expense – Depreciation – Amortization

Explanation:

• Earnings Before Interest Taxes (EBIT) is the company’s total revenue less cost of goods sold and depreciation.
• Interest Expense is the cost of borrowing money.
• Depreciation is the reduction in the value of assets over time.
• Amortization is the process of spreading the cost of intangible assets over their useful lives.

EBITDA is a useful metric for comparing companies with different capital structures and industries. It is also used to calculate other financial ratios, such as the current ratio and quick ratio.

Example:

• Company A has revenue of $100,000, cost of goods sold of $60,000, depreciation of $10,000, and interest expense of $5,000.
• EBITDA = $100,000 – $60,000 – $10,000 – $5,000 = $25,000

Notes:

• EBITDA is not a generally accepted accounting principle (GAAP) measure.
• Some companies may adjust EBITDA to exclude certain items, such as extraordinary items or non-operating income.
• EBITDA should not be used as the only measure of a company’s financial health.