EBITDA: Abbreviation for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a measure of a company's operating cash flow based on data from the company's income statement. Therefore, EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization).
The term “EBITDA” is used all day, every day, in the M&A industry. It compares companies' financial performance, and by canceling out interest, taxes, depreciation, and amortization, the operational profitability of businesses can be assessed and compared on equal ground. For example, Company A has a high debt service and, as a result, has a high-interest expense each month. Company B is a similar company but operates debt-free. EBITDA puts them on equal ground because that interest calculation is added back.
So, why is your EBITDA number important? Essentially, it’s a good indicator of how much profit your company makes based on its current assets and operations. However, EBITDA is not the only financial factor to consider in your analysis. Companies with high EBITDA margins can have high working capital and capital expenditures requirements that are not accounted for in the calculation.
EBITDA is often used by valuation firms when evaluating a company. If you would like a free valuation of your business, give us a call or use the Valuation Portal found at the bottom of this page.
Question: What factor do you think influences EBITDA the most?