EBITDA Library

What is EBITDA?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is also known as operating profit because it strips out how the company is financed and how the company is structured from a tax perspective. EBITDA is a popular alternative to accounting earning metrics such as net income and cash flow from operations.

The EBITDA formula, or calculation, is as follows:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA = NI + I + T + D + A

Where:

NI = Net Income

I = Interest Expense

T = Income Tax Expense

D = Depreciation Expense

A = Amortization Expense

What’s the difference between EBITDA and Net Income?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Net income, which is a generally accepted accounting principle metric, represents earnings after interest, taxes, depreciation, and amortization.

What’s the difference between EBITDA and EBIT?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. EBIT stands for earnings before interest and taxes. Consequently, the difference between EBITDA and EBIT pertains to any non-cash depreciation expense and non-cash amortization expense.

What are the advantages of using EBITDA?

One of the key advantages of using EBITDA is because it strips out how a company is financed (by adding back interest expense) and how a company is structured from a tax perspective (by adding back income tax expense). This allows investors and analysts to compare profitability among companies and industries, as it eliminates the affects of financing (capital structure and cost of debt) and related tax implications (tax entity structure, tax jurisdictions, tax rates).

What’s the history of EBITDA?

EBITDA became popular in the mid-1980s when leveraged buyout investors were analyzing and acquiring financially distressed companies. The EBITDA metric provided a fast assessment in terms of assessing these at-issue companies ability to pay back the impending debt.

What is Enterprise Value?

Enterprise value is a valuation metric that represents the total worth of a company. In other words, it represents the theoretical purchase/selling price of an entire company.

How does EBITDA affect Enterprise Value?

Generally speaking, the value of a company is the summation of its future cash flow streams. At its core, EBITDA is a solid measure of a company’s cash flow, and when applied to a valuation mulitple; owners, analysts, bankers, and investors can quickly gain a rough estimate of a company’s enterprise value.

Valuing a company through EBITDA utilizes the following formula:

Enterprise Value = EBITDA x VM

In this formula, VM is a valuation multiple that varies depending on the company’s size, industry, and other factors. EBITDA represents the company’s most recent year’s (or last twelve months) of earnings before interest, taxes, depreciation, and amortization.

EBITDA remains one of the best ways to value a company, and includes wide support from the finance, investment, and banking communities.

What is the EBITDA Mutliple?

The EBITDA multiple is the product of a company’s enterprise value compared to its most recent annual EBITDA. The formula for the EBITDA multiple is as follows:

EBITDA Multiple = Enterprise Value / EBITDA

What is LTM EBITDA?

LTM EBITDA stands for earnings before interest, taxes, depreciation, and amortization for a company’s last twelve months (“LTM”). It is sometimes referred to as trailing twelve months (“TTM”).

What is Adjusted EBITDA?

Adjusted EBITDA is also referred to as “normalized” EBITDA. The goal of Adjusted EBITDA is to get to an earnings metric that is more normal and sustainable (i.e., by adding back any one-time or non-recurring charges, etc.). Some examples of non-recurring and/or unusual adjustments to EBITDA include:

  1. Above-Market Compensation
  2. Share-Based Compensation
  3. Owner Personal Expenses
  4. Above-Market Rent
  5. Non-Recurring Litigation
  6. Non-Recurring Insurance
  7. Unusual Bad Debt or Inventory Write-off
  8. Unrealized Gains/Losses
  9. Restructuring Costs
  10. Other Income/Loss