EBITDA is a financial metric that measures a company’s operating performance by excluding interest, taxes, depreciation, and amortization from earnings.
EBITDA is widely used to evaluate a company’s core operating profitability without the impact of financing decisions, tax structures, or non-cash expenses. It helps investors and analysts compare companies more effectively, especially across industries.
The formula is:
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
EBITDA focuses on earnings generated from business operations, making it useful for assessing cash flow potential and operational efficiency. It is commonly used in valuation metrics like EBITDA margin and Enterprise Value (EV) to EBITDA ratio.
However, EBITDA has limitations. It ignores capital expenditures and debt obligations, so it should not be considered a complete measure of financial health. It is best used along with other metrics like net profit, cash flow, and revenue growth.
"<p> If a company has: </p> <ul> <li>Net Profit = ₹5 crore</li> <li>Interest = ₹1 crore</li> <li>Taxes = ₹2 crore</li> <li>Depreciation = ₹1 crore</li> <li>Amortization = ₹1 crore</li> </ul> <p> Then EBITDA = ₹10 crore </p>"