Profitability
EBITDA
EBITDA is operating profit with depreciation and amortization added back, a bridge toward cash earnings.
EBITDA exists so companies with different tax rates, debt costs, and depreciation schedules can be compared on something like operating earning power. It is the denominator in EV/EBITDA. Adding back depreciation is reasonable when depreciation is an accounting echo of old spending. It is misleading when the assets really do wear out and must be replaced.
Never treat EBITDA as cash you can dividend. Interest and tax are real, and maintenance capital spending is real. If a pitch stops at EBITDA, continue the walk yourself down to free cash flow before you accept the valuation.
Formula
EBITDA = earnings before interest, tax, depreciation, and amortization
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Use the market cap as the equity piece of enterprise value. Add debt and subtract cash from the balance sheet before you trust an EV multiple.
Related
EV/EBITDA · Operating Margin · Free Cash Flow
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Questions
Is EBITDA a standardized GAAP number?
It is a defined subtotal people compute from GAAP lines, but companies also publish 'adjusted EBITDA' that adds back stock compensation and other costs. Read the bridge.
When is EBITDA a bad metric?
When capital spending is the business: airlines, factories, telecom networks. Depreciation there is not a fiction.