EBITDA - Earnings Before Interest, Taxes, Depreciation & Amortization Expense
EBITDA stands for Earnings before Interest, Taxes, Depreciation & Amortization expense. EBITDA is a tool to measure the value of a firm based on its net earnings before non-cash expenses (depreciation & amortization) are recorded, as well as dilutive expenses such as interest expense & taxes. EBIDTA is used by financial valuation experts to measure the true value of a business, especially for private capital firms. Here is why private capital banks like the EBITDA formula:
i) Interest & Taxes - Replace current tax rates & Interest rates with their own tax & interest rates based on the current & new capital structure of the corporation, new debt convenants or refinancing with the banks.
ii) Amortization & Depreciation - These are excluded because they are non-cash expenses for capital or intangible assets which were acquired in prior periods, and do not represent a cash outlay of the organization.
Financial advisors recommend using EBITDA as a way to measure the cash generation activities of an organization. The formula for Earnings before Interest, Taxes, Depreciation & Amortization is:
As an example, let's calculate the EBITDA for Checkpoint Software Technology Ltd.
What is EBITDA?
Drawbacks of using EBITDA