Earnings Before Interest, Taxes, Depreciation, and Amortization or EBITDA is one of the measures of determining profitability to net income. EBITDA is a company's cash profit from operations since it removes the non-cash depreciation and amortization, taxes, and debt costs from the calculation.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization OREBITDA = Operating Profit + Depreciation + AmortizationIf Vareto’s net income is $450,000, interest cost is $10,000, Taxes are $1,500, depreciation is $10,000 and amortization is $6,000. EBITDA = $450,000+$10,000+$1,500+$10,000+$6,000 = $477,500
Why it matters
EBITDA can help potential buyers and investors to compare the valuation of different companies. For businesses, EBITDA can help in enhancing their exit strategy and aid other business decisions, especially operational ones.