Understanding EBITDA

Continuing Learning Series

This article is a part of ACS Continuing Learning Series, which is a series of short articles, published by ACS Consulting at short regular intervals on a variety of subjects related to strategy, corporate finance, financial planning & analysis, business planning and performance management.

Subject: Financial Analysis

Relevance:

• Anyone who aspires to pursue a career as an investment analyst.

• Anyone who aspires to pursue a career within corporate finance.

• Anyone who is generally interested in capital markets and investment appraisals.

---

EBITDA Defined

Earnings before interest, taxes, depreciation & amortization (EBITDA) is a measure of a business’s profitability which is widely used by investors to assess real business performance and make comparison between firms in the same line of business. In some cases, it can also provide a more accurate view of the company's real performance over time. Another similar measure (EBITA) does not exclude depreciation from the accounting profit (explored further below).

Why EBITDA

Profitability is earnings generated throughout the ordinary course of doing business. A clearer picture of the company's profitability may be gained if capital expenditures and financing costs are subtracted from the official earnings total.

Accounting standards and conventions have arguably taken the concept of prudence to a level that the reported accounting profits could contain a lot of noise and distortion making performance evaluation and benchmarking performance rather difficult for investment analysts. The shareholder valu