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Words nearby EBITDA
What does EBITDA mean?
EBITDA is a financial abbreviation that stands for Earnings Before Interest, Tax, Depreciation, and Amortization.
Where does EBITDA come from?
EBITDA assesses a company’s financial performance while excluding factors like taxes and accounting and financing decisions, which often lie outside of the regular, recurring consideration and control of the business’s operations. It is evaluated by taking the company’s net earnings before interest and taxes (EBIT), then adding the depreciation and amortization (DA) expenses.
Knowing a company’s EBITDA margin is a way of measuring a company’s operating profitability. To calculate an EBITDA margin, one would take the company’s EBITDA number (say, $30,000), and divide it by the company’s total revenue (for example, $75,000), equaling 40%. A higher percentage correlates to lower operating expenses, and thus higher bottom lines.
The term EBITDA is credited to John C. Malone, the former president and CEO of Tele-Communications, in the 1970s. It became a popular measurement of a company’s cash flow in the 1980s. EBITDA was heavily used by leveraged buyout investors as a tool to quickly assess whether floundering companies could successfully pay back interest on its debt over a reasonably short length of time, such as a few years, by comparing the ratio between the company’s interest and its EBITDA. This measurement system has since expanded to be used by many different types of industries, companies, and firms.
Writing for Forbes, certified treasury professional Ted Gavin described the EBITDA form of measuring profitability as a “great big lie” and a “fairy tale,” since it can make companies look as if they’re in better shape than they really are, among other accounting-related concerns. Other critics point out that EBITDA ignores so many expenses that it paints a false picture of how profitable a company really is, since a company can make itself seem more successful by showing off its EBITDA number in order to avoid displaying the severity of its high debt levels.
Examples of EBITDA
“When LinkedIn reported its second quarter earnings results, it revealed Microsoft paid just 63 times the company’s trailing-12-month EBITDA.”
—Adam Levy, The Motley Fool, September 2016
“Over the past four quarters, Nathan’s Famous generated $96.1 million in revenue, adjusted EBITDA of $20.2 million and free cash flow of $14 million.”|
—Antoine Gara, Forbes, March 2015
This content is not meant to be a formal definition of this term. Rather, it is an informal summary that seeks to provide supplemental information and context important to know or keep in mind about the term’s history, meaning, and usage.