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Definition

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a measure of operating cash flow, which reduces the effect of accounting, financing, and tax policies on reported profits.[1]

Purpose

It is used to assess the "operating" profit of the business. It is a rough way of calculating how much cash the business is generating and is even sometimes called the "operating cash flow." It can be useful because it removes factors that change the view of performance depending upon the accounting and financing policies of the business. Supporters argue it reduces management's ability to change the profits they report by their choice of accounting rules and the way they generate financial backing for the company. This metric excludes from consideration expenses related to decisions such as how to finance the business (debt or equity) and over what period they depreciate fixed assets. EBITDA is typically closer to actual cash flow than is NOPAT.

Construction

EBITDA can be calculated by adding back the costs of interest, depreciation, and amortization charges and any taxes incurred.

EBITDA ($) = Net profit ($) + Interest Payments ($) + Taxes Incurred ($) + Depreciation and Amortization Charges ($)

References

  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>

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