EBITDA
Also called Earnings before interest, tax, depreciation and amortisation.
Operating profit with depreciation and amortisation added back.
EBITDA = operating income + depreciation + amortisationWhat it means
EBITDA strips out four things: how a company is financed, where it pays tax, and the accounting charges for assets bought in earlier years. What is left is meant to approximate the cash the operations throw off, which makes it useful for comparing businesses with very different debt loads and asset bases.
It is also the most argued-about number in finance, because those add-backs are real costs deferred rather than costs that do not exist. Depreciation is the accountant's estimate of equipment wearing out, and equipment does wear out.
Worked example
Operating income of $180m, with $60m of depreciation and $20m of amortisation.
- 1180 + 60 + 20 = 260.
EBITDA of $260m.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- It is most defensible for capital-intensive businesses being compared with each other, and least defensible as a proxy for cash a shareholder could actually receive.
- Compare EBITDA against free cash flow over several years. A persistent gap is the depreciation add-back turning back into real capital expenditure.
- Treat any company-defined "adjusted EBITDA" as a marketing figure until you have read what was adjusted out.
Where it misleads
- Ignoring depreciation understates the true cost of running an asset-heavy business, which is why it is popular with them.
- It sits above interest, so it says nothing about whether a leveraged company can service its debt.
- It is not a defined accounting measure, so companies can and do construct it differently.
How Materiality uses it
Used as the denominator in two scorecard metrics: net debt to EBITDA in the Financial health category, and EV/EBITDA in Valuation. It is not presented as a headline profit figure anywhere, deliberately.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Related metrics
Operating margin
Profit from running the business, before interest and tax, as a share of revenue.
Net debt
Total borrowings less the cash on hand.
EV/EBITDA
What the whole business costs, per dollar of pre-depreciation operating profit.
Free cash flow
Operating cash flow less capital expenditure: what the business actually generated for its owners.
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.