Earnings before interest, taxes, D&A (EBITDA)

Definition

Earnings before interest, taxes, D&A (EBITDA) in plain English

EBITDA takes EBIT (operating profit) and adds back depreciation and amortization — 'D&A,' which are accounting charges that spread the cost of big items a company already bought, like machines or software, across the years they get used. Because those charges aren't cash actually leaving the company this year, adding them back gives a rough picture of the cash the business throws off before it spends on new big equipment. Imagine you bought a $3,000 pizza oven and accounting makes you count $300 of 'wear-and-tear' as a cost every year for 10 years — that $300 isn't money leaving your pocket now, so EBITDA ignores it to show real cash flow. It's only a proxy, though, because eventually that oven really does need replacing with real cash.

Learn these first

• P/E ratio

Practice Earnings before interest, taxes, D&A (EBITDA)

Why is EV/EBITDA often preferred over the P/E ratio when comparing companies with different capital structures?

Related Principles of Finance terms

• Altman Z-score
• Asset turnover
• Basel III
• Cash conversion cycle
• Cash flow from operations (CFO)
• Cash ratio
• Current ratio
• Days inventory outstanding (DIO)
• Days payable outstanding (DPO)
• Days sales outstanding (DSO)