What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. 

EBIDTA measures a company’s profitability by focusing on its core operations, excluding costs like interest, taxes, and non-cash expenses (depreciation and amortization).

How is EBITDA calculated?

The formula for EBITDA:

EBITDA = (Net Income+ Interest + Taxes + Depreciation + Amortization)

If a company has:

Net Income: $100,000

Interest: $20,000

Taxes: $30,000

Depreciation: $10,000

Amortization: $5,000

Using this, we can calculate EBITA as follows

EBIDTA = (100,000 + 20,000 + 30,000 + 10,000 + 5,000)

EBIDTA = $165,000

Why is EBITDA important before investing?

Core Profitability: It helps investors assess a company’s operational efficiency by focusing only on the revenue and core expenses.

Comparison: It enables comparison across companies within the same industry, regardless of their capital structure, tax policies, or non-cash expenses.

Cash Flow Insights: Since it excludes non-cash expenses, EBITDA offers a clearer view of the company’s cash-generating potential.

Using EBITDA with Other Ratios

• EBITDA Margin: Evaluates operational profitability by dividing EBITDA by total revenue
• EV/EBITDA Ratio: Compares a company’s Enterprise Value (EV) to its EBITDA, helping investors assess if a stock is overvalued or undervalued relative to its peers

By understanding EBITDA, you can gauge a company’s ability to generate profit from its operations, a critical factor when making stock investment decisions.

Hope this gives you an idea about the factors to be understood and utilized before making an investment.

All the best

God Bless!