EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and its margins reflect a firm's short-term operational efficiency. EBITDA is useful when comparing companies with different capital investment, debt, and tax profiles. EBITDA = Net Income + Interest +Tax + Depreciation &Amortization How is EBITDA used?
When calculating EBITDA, you’re measuring your company’s net income with costs associated with interest expenses, taxes, depreciation and amortization added back in.
Analyzing a company’s financial health using EBITDA became popular in the 1980s at the height of the leveraged buyout era. During this time, it was common for investors to financially restructure distressed companies, and EBITDA was primarily used as a yardstick of whether a business could afford to pay back the interest associated with restructuring.
Today, EBITDA is used to do the following:
To determine a company's Debt Service Coverage Ratio(DSCR)
Give an overall view of performance