What Is Earnings Before Interest, Tax, Depreciation & Amortization (EBITDA)?

EBITDA stands for Earnings Before Interest, Tax, Depreciation & Amortization and is one of the most commonly used indicators of the profitability of a firm.

The EBITDA calculation is Operating Income + Depreciation + Amoritzation + Stock-Based Compensation.

EBITDA is a popular metric used for comparing companies, particularly with an LBO. The most common multiple using EBITDA is:

The reason behind using EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) is because it allows you to see both the profitability of a firm excluding taxes and also because it shows the ability of the firm to service debt (hence its popularity in debt-financed buyouts) and that it is not affected by capital structure (i.e. debt payments).

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