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EBITDA definition
EBITDA is a measure of a company's operating profitability that strips out financing, tax, and non-cash charges. The acronym stands for earnings before interest, taxes, depreciation, and amortisation, the four items added back to reach the figure.
EBITDA is found by adding interest, taxes, depreciation, and amortisation back onto net income, or by adding depreciation and amortisation onto operating income. Investors, lenders, and buyers use it to compare companies that carry different capital structures, tax positions, and asset bases.
EBITDA sits above two related profit lines. Operating income deducts depreciation and amortisation but not interest or tax, so it lands below EBITDA; net income deducts all four, so it lands lower still. A company can post strong EBITDA while still facing heavy debt costs, large reinvestment needs, or weak free cash flow.
EBITDA Example
A company reports five figures for the year:
- Net income: USD 500,000 - Interest expense: USD 80,000 - Taxes: USD 120,000 - Depreciation: USD 150,000 - Amortisation: USD 50,000
EBITDA adds the four non-operating items back onto net income:
EBITDA = net income + interest + taxes + depreciation + amortisation
USD 500,000 + USD 80,000 + USD 120,000 + USD 150,000 + USD 50,000 = USD 900,000
The company's EBITDA is USD 900,000.
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