Definition:

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric used to evaluate a company's operating performance by focusing on earnings from core business operations.

Formula:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

How to use the metric:

EBITDA is used to assess a company's profitability from its core operations, excluding the effects of capital structure, tax rates, and non-cash accounting items. It is often used by investors and analysts to compare the financial performance of companies within the same industry.

Limitations:

EBITDA does not account for changes in working capital, capital expenditures, or the cost of debt and taxes, which can be significant for some companies. It may also give a misleading picture of a company's financial health if used in isolation, as it ignores important expenses and cash flow considerations.

Applies to:

EBITDA is commonly used in industries with significant capital expenditures and depreciation, such as telecommunications, manufacturing, and utilities, where it helps to compare companies with different capital structures.

Doesn't apply to:

EBITDA may not be as useful in industries with low capital expenditures or where working capital changes are significant, such as financial services or technology, because it can overlook key financial aspects like cash flow and net income.

Summary:

EBITDA is a widely used financial metric that provides insight into a company's operational profitability by excluding interest, taxes, depreciation, and amortization. While useful for comparing companies within capital-intensive industries, it has limitations and should be used alongside other financial metrics for a comprehensive analysis.