EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a way of measuring a company's profitability from its core operations, before factoring in how the company is financed (debt versus equity), what tax rate it pays, and how it accounts for the aging of its physical and intangible assets.

It is built by starting with net profit (the bottom-line earnings figure on the income statement) and adding back four things: interest expense, taxes paid, depreciation (the gradual expensing of physical assets like machinery or buildings over their useful life), and amortization (the same idea applied to intangible assets like patents or acquired trademarks). The interest and tax figures come straight off the income statement; depreciation and amortization are usually found in the cash flow statement or the notes to the financial statements. Add all four back to net profit and you get EBITDA.

The nuance that trips people up is thinking EBITDA is "real cash profit." It is not. Depreciation and amortization are non-cash accounting entries, so adding them back can make a business look more profitable than the cash actually coming in, especially for capital-intensive companies that constantly need to replace expensive equipment. EBITDA also ignores interest payments on debt, which can hide the fact that a heavily leveraged company is spending a large share of its actual cash flow just servicing loans. It is a useful way to compare operating performance across companies with different capital structures or tax situations, but it is not a substitute for looking at net income or actual cash flow.

Because it strips out financing and accounting choices, EBITDA is popular in company reports, analyst commentary, and news headlines as a quick performance snapshot. Traders encounter it mainly around earnings season, when companies report it alongside or instead of net income.