What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's operating profitability that strips out the effects of financing structure (interest), tax jurisdiction (taxes), and accounting decisions about capital assets (depreciation, amortization).

How to calculate

Two paths to the same number:

From the top: ``` Revenue - Cost of goods sold - Operating expenses (excluding D&A) = EBITDA ```

From the bottom: ``` Net income + Interest + Taxes + Depreciation + Amortization = EBITDA ```

Why people use it

• Comparability — strips out tax jurisdiction and capital structure differences when comparing companies
• Cash flow proxy — for asset-light businesses, EBITDA approximates operating cash flow
• Valuation — most M&A multiples are quoted as "X × EBITDA"

Why it can mislead

EBITDA ignores capital expenditure requirements. A capital-intensive business (manufacturing, transportation) with healthy EBITDA may be cash-flow negative after replacing aging equipment. Use EBITDA alongside free cash flow, not in place of it.

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