Investiční slovník
Term of the Month December: EBITDA — What It Is and Why No Company Analysis Can Do Without It
Key takeaways
- EBITDA = earnings before interest, taxes, depreciation, and amortisation — measures operating performance without the influence of financing and accounting conventions.
- It allows comparison of companies with different capital structures and from different countries.
- Advantage: eliminates the influence of the method of financing and tax environment on comparison.
- Disadvantage: ignores actual capital expenditure (capex) — a company with high investment needs can look better than it is.
- EV/EBITDA is one of the key valuation metrics when comparing companies within a sector.
EBITDA — the acronym for Earnings Before Interest, Taxes, Depreciation and Amortisation — is probably the most widely used metric in company analysis and simultaneously one of the most controversial. Why? Because it measures precisely what it says — and thereby deliberately omits things that are essential for some investors.
What EBITDA measures
EBITDA says: how much operating profit a company generates before the method of financing (interest), tax environment, and accounting decisions about asset depreciation enter the calculation. The result is a figure that more effectively compares operating performance regardless of where companies are based, how they are leveraged, or how aggressively they depreciate their assets.
In practice: if you compare a manufacturing company and the same type of firm in another country, their taxes and methods of financing differ. EBITDA eliminates this noise and asks: who is operationally more efficient?
Where EBITDA is most commonly used
- EV/EBITDA — the ratio of enterprise value to EBITDA, a key metric for valuing and comparing companies within a sector
- Debt / EBITDA — leverage ratio; banks and analysts watch how many times EBITDA covers debt
- M&A transactions — in acquisitions, EBITDA is the baseline metric for determining price
EBITDA vs. EBIT vs. net income
For completeness: EBIT (Earnings Before Interest and Taxes) includes depreciation — closer to economic reality. Net income includes everything but is heavily influenced by one-off items and the tax environment. EBITDA is the broadest and least "real" number — it therefore requires context, not blind faith.
The EBITDA metric appears in company analyses — more in the company analyses section.
FAQ
What does the abbreviation EBITDA stand for?
Earnings Before Interest, Taxes, Depreciation and Amortisation — operating profit before the effects of financing costs, taxes, and accounting depreciation of assets.
Why do analysts use EBITDA instead of net income?
EBITDA eliminates the influence of the method of financing, tax environment, and depreciation accounting methods. It thereby enables comparison of the operating performance of companies from different countries and with different capital structures.
What are the limitations of EBITDA?
EBITDA ignores capital expenditure (capex) — the actual investment in renewing and developing assets. A company with high investment needs may look better in EBITDA than it actually is.
What is EV/EBITDA and what is it used for?
EV/EBITDA compares the total enterprise value with its EBITDA. It is used to value companies and compare them within a sector — a lower ratio may indicate an undervalued company.