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company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandated payments, and costs required to maintain its asset base. It is derived by subtracting from revenues all costs of the operating business (e.g. wages, costs of raw materials, services ...) but not decline in asset value, cost of borrowing, lease expenses, and obligations to governments. Though often shown on an
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
, it is not considered part of the
Generally Accepted Accounting Principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(GAAP) by the SEC and the SEC hence requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to
net income In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest ...
.


Usage and criticism

EBITDA is widely used when assessing the performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone, i.e. how much profit the business generates by providing the services, selling the goods etc. in the given time period. This type of analysis is useful to get a view of the profitability of the operating business alone, as the cost items ignored in the EBITDA computation are largely independent from the operating business: The interest payments depend on the financing structure of the company, the tax payments on the relevant jurisdictions as well as the interest payments, the depreciation on the asset base and depreciation policy chosen and the amortisation on takeover history with its effect on goodwill among others. EBITDA is widely used to measure the valuation of private and public companies (e.g. saying that a certain company trades at x times EBITDA, meaning that the company value as expressed through its stock price equates to x times its EBITDA). In its attempt to display EBITDA as a measure of the underlying profitability of the operating business, EBITDA is often adjusted for extraordinary expenses, i.e. expenses that the company believes do not occur on a regular basis. These adjustments can include bad debt expenses, any legal settlements paid, costs for acquisitions, charitable contributions and salaries of the owner or family members. The resulting metric is called adjusted EBITDA or EBITDA before exceptionals. A negative EBITDA indicates that a business has fundamental problems with profitability. A positive EBITDA, on the other hand, does not necessarily mean that the business generates cash. This is because the cash generation of a business depends on EBITDA as well as on
capital expenditures Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
(needed to replace assets that have broken down), taxes, interest and movements in Working Capital. While being a useful metric, one should not rely on EBITDA alone when assessing the performance of a company. The biggest criticism of using EBITDA as a measure to assess company performance is that it ignores the need for capital expenditures in its assessment. However, capital expenditures are needed to maintain the asset base which in turn allows for generating EBITDA.
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
famously asked, "Does management think the tooth fairy pays for capital expenditures?". A fix often employed is to assess a business on the metric EBITDA - Capital Expenditures.


Margin

EBITDA margin refers to EBITDA divided by total revenue (or "total output", "output" differing from "revenue" according to changes in inventory).


Variations


EBITA

Earnings before interest, taxes, and amortization (EBITA) is derived from EBITDA by subtracting Depreciation. EBITA is used to include effects of the asset base in the assessment of the profitability of a business. In that, it is a better metric than EBITDA, but has not found widespread adoption.


EBITDAR


EBIDAX

Earnings Before Interest, Depreciation, Amortization and Exploration (EBIDAX) is a non- GAAP metric that can be used to evaluate the financial strength or performance of oil, gas or mineral company. Costs for exploration are varied by methods and costs. Removal of the exploration portion of the balance sheet allows for a better comparison between the energy companies.


OIBDA

Operating income before depreciation and amortization (OIBDA) refers to an income calculation made by adding
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
and amortization to
operating income In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and ope ...
. OIBDA differs from EBITDA because its starting point is operating income, not earnings. It does not, therefore, include non-operating income, which tends not to recur year after year. It includes only income gained from regular operations, ignoring items like FX changes or tax treatments. Historically, OIBDA was created to exclude the impact of
write-down A write-off is a reduction of the recognized value of something. In accounting, this is a recognition of the reduced or zero value of an asset. In income tax statements, this is a reduction of taxable income, as a recognition of certain expenses ...
s resulting from one-time charges, and to improve the optics for analysts comparing to previous period EBITDA. An example is the case of
Time Warner Warner Media, LLC ( traded as WarnerMedia) was an American multinational mass media and entertainment conglomerate. It was headquartered at the 30 Hudson Yards complex in New York City, United States. It was originally established in 1972 by ...
, who shifted to divisional OIBDA reporting subsequent to write downs and charges resulting from the company's merger into
AOL AOL (stylized as Aol., formerly a company known as AOL Inc. and originally known as America Online) is an American web portal and online service provider based in New York City. It is a brand marketed by the current incarnation of Yahoo! Inc. ...
.


EBITDAC

Earnings before interest, taxes, depreciation, amortization, and coronavirus (EBITDAC) is a non- GAAP metric that has been introduced following the global
COVID-19 pandemic The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...
. EBITDAC is a special case of adjusted EBITDA. On 13 May 2020,
the Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
mentioned that German manufacturing group Schenck Process was the first European company to use the term in their quarterly reporting. The company had added back €5.4m of first-quarter 2020 profits that it said it would have made were it not for the hit caused by 'missing contribution margin and cost absorption reduced by direct financial state support received majorly in China so far'. Other companies picked up this EBITDAC measure as well, claiming the state-mandated lockdowns and disruptions to the supply chains distort their true profitability, and EBITDAC would show how much these companies believe they would have earned in the absence of the coronavirus. Like other forms of adjusted EBITDA, this can be a useful tool to analyse companies but should not be used as the only tool.


See also

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Earnings before interest and taxes In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and ope ...
(EBIT) * EV/EBITDA * Gross profit *
Net income In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest ...
*
Net profit In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, ...
*
Operating margin In business, operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income ("operating profit" in the UK) to net sales, usually expressed in percent. ...
*
Owner earnings Owner earnings is a valuation method detailed by Warren Buffett in Berkshire Hathaway's annual report in 1986. He stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the ...
* P/E ratio *
Revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...


References


Further reading

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External links


Investopedia definition of EBITDA
{{DEFAULTSORT:Earnings before interest, taxes, depreciation, and amortization (EBITDA) Fundamental analysis Profit Private equity