EBITDA

Earnings before interest, tax, depreciation and amortisation - in practice, operating profit with the depreciation and amortisation charge added back.

Example

Northgate's operating profit of 550,000 plus 180,000 of depreciation gives EBITDA of 730,000.

Important

It is not cash. Adding back depreciation removes the accounting charge for wearing equipment out but not the money needed to replace it, so for an asset-heavy business it describes cash the owner never gets to use.

Related terms

  • Operating margin — Operating profit as a percentage of revenue - what is left after the costs of running the business but before interest and tax. It asks whether the business around the product makes money.
  • Depreciation and amortisation — The accounting charge that spreads the cost of a long-lived asset across the years it is expected to be used - depreciation for physical assets, amortisation for intangible ones.
  • Net debt — Borrowings minus cash. The measure of indebtedness that accounts for the money already sitting in the bank to repay it.

Lessons that explain it

  • Three engines: profit growth, debt paydown and a higher exit multiple — Buyout returns come from growing earnings, using cash flow to repay debt, and selling at a higher valuation multiple - and only the first is reliably within the manager's control. (13 min)
  • The income statement: what it claims was earned — The income statement is a claim about performance over a period, assembled under rules that deliberately ignore when the cash moved. Read properly it is the most useful statement; read literally it is the most misleading. (12 min)
  • The return is discretionary earnings, financed with debt the business itself has to service — Seller's discretionary earnings is a reconstructed number built from add-backs, and almost every small-business purchase is financed with debt the business's own cash flow is expected to repay - which makes the add-back schedule the single most consequential piece of arithmetic in the deal. (12 min)

All 578 terms in the Investing glossary