EBITDA is an acronym that stands for:
Earnings
Before
Interest
Taxes
Depreciation
Amortization
What is EBITDA?
Why is it important?
EBITDA is an acronym that stands for:
Earnings
Before
Interest
Taxes
Depreciation
Amortization
EBITDA is not a number that you will typically see on a company’s financial statements
It’s a measure that companies calculate separately in a 10K filing or one that you could calculate yourself
You probably have a good idea of what “Profit” is
Profit is what is left over after deducing expenses from a
company’s revenue
You can calculate it as follows:
1) Start with Net Profit
2) Add: Interest, Taxes, Depreciation, Amortization
3) The result is EBITDA
There is no right answer here. It depends on what you’re measuring
I’m fully expecting commentators in this thread quoting Warren Buffet to me saying something along the lines of “EBITDA is a useless measure”
(i) who invented EBITDA
(ii) who uses EBITDA
EBITDA was invented by someone who you've probably never heard of but has had a huge impact on your life: John Malone
John Malone is a billionaire cable operator and investor
So he convinced his investors and lenders to focus on “cash flow” and ignore earnings
By simply focusing higher up the income statement - that’s how he invented EBITDA
From personal experience working in equity research
I can tell you that valuations multiples using EBITDA are more frequently used than valuation multiples using earnings
Focus on EBITDA, not earnings
Why is this?
This means EBITDA doesn’t care about how much debt you use to finance your business (that’s why you add back interest)
Let’s look at an example to understand this better:
Company A and Company B
Both companies are exactly the same in every aspect:
(i) same industry
(ii) same financial performance
(iii) same size
Company B doesn’t raise money but instead uses debt and makes $90K in profit/year after deducting $10K in interest costs per year
Is Company A better than Company B?
• Company A used equity
• Company B used debt
Funding decisions are not fixed and to a certain extent could be changed
Company B decided not to dilute shareholders and use debt
There is nothing stopping Company B from:
• Raising money from investors
• Paying back the debt it carries
• Be as profitable as Company A
EBITDA adjusts for how a company is funded making comparisons on an apples-to-apples basis
1. EBITDA is a non-GAAP measure
2. You can calculate EBITDA yourself
3. EBITDA is more frequently used than earnings for valuations
4. EBITDA is an un-levered measure
5. EBITDA ignores how a company is funded
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Democrats & DNC Media are going to LITERALLY have nothing coherent to say in response to that.
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