Dictionary / How companies make money
What Is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is profit before a few costs are taken out, used to compare how well businesses run.
EBITDA in simple terms
Start with operating profit. Then add back the wear and tear on equipment, called depreciation and amortization. What you get shows how much the core business earns before debt, taxes and old investments are counted.
Why people use EBITDA
It makes companies with different debt and tax situations easier to compare. Two phone companies may run equally well, but one has more debt. EBITDA puts them side by side. It is often used with enterprise value.
Is EBITDA the same as gross profit?
No. Gross profit only takes out the direct cost of making products. EBITDA also takes out running costs like staff, rent and marketing. It sits between gross profit and net profit.
What is a good EBITDA?
It depends on the industry. EBITDA margin, which is EBITDA divided by revenue, is often 10% to 20% for many businesses, and much higher for software. Compare within an industry.
The catch
EBITDA ignores real costs. Equipment wears out and must be replaced, and debt must be paid. Warren Buffett has warned about this. Always check free cash flow too.
See it in real companies
Open a company to see what it sells and how it makes money.