How does EBITDA differ from operating profit?

EBITDA is calculated by adding non-cash expenses such as depreciation and amortization back to operating profit. It is used to make it easier to compare the earning power of companies by removing the effects of differences in the scale of capital investment and depreciation methods.

Does a high EBITDA mean a company is good?

The level of EBITDA alone cannot be used to judge whether a company is superior or inferior. The appropriate level varies by industry and business scale, and it is common to also check factors such as the company's debt situation and need for capital investment.

EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a metric that adds depreciation and amortization back to operating profit to show a company's cash-based earning power.

EBITDA = Operating Profit + Depreciation and Amortization (one simplified method of calculation)

What It Measures

EBITDA is a metric that shows the cash-based earning power generated by a company's core business activities, with the effects of interest, taxes, and depreciation/amortization removed. Because it allows comparison without the effects of differences in the scale of capital investment, debt levels, and depreciation methods (straight-line, declining-balance, etc.), it is sometimes used to compare the earning power of companies across industries and countries.

Relationship with the EV/EBITDA Multiple

EBITDA is also used as the denominator of the EV/EBITDA multiple, which shows how many times a company's EBITDA its enterprise value (EV) represents. This multiple is sometimes referenced as a rough guide to how many years' worth of EBITDA would be needed to cover the cost of an acquisition, but it is only one reference metric and does not guarantee any investment outcome.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

How does EBITDA differ from operating profit?: EBITDA is calculated by adding non-cash expenses such as depreciation and amortization back to operating profit. It is used to make it easier to compare the earning power of companies by removing the effects of differences in the scale of capital investment and depreciation methods.
Does a high EBITDA mean a company is good?: The level of EBITDA alone cannot be used to judge whether a company is superior or inferior. The appropriate level varies by industry and business scale, and it is common to also check factors such as the company's debt situation and need for capital investment.

Related terms

Operating Margin