EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization. 

EBITDA is the one of the most important performance metrics for any business.

Why is EBITDA so important?

EBITDA is important because it is a proxy, a close estimate, for the amount of cash produced by a company in a given amount of time (typically one year).  It is a metric which measures the operating performance of a company, independent of a) the debt owed by the company, and b) the tax rate(s) which apply to the business.

How is EBITDA calculated?

Mathematically, EBITDA is computed as shown below (see here for help on an Income Statement):

Operating Income

Plus:  Depreciation Expense

Plus:  Amortization Expense

Equals:  EBITDA

For example, a company with the following Income Statement:

Income Statement 12 Mos Ending December
Sales $100
Cost of Sales $50
Gross Profit $50
Operating Expenses:
Salaries $30
Depreciation $5
Rent $5
Operating Income $10

Calculating EBITDA:

EBITDA = Operating Income + Depreciation Expense + Amortization Expense

EBITDA = $10 + $5 + $0

EBITDA = $15


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