Financial Glossary
Earnings before interest taxes depreciation and amortization
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's core operating profitability by excluding the effects of financing decisions (interest), tax jurisdictions (taxes), and non-cash accounting charges (depreciation and amortization). Formula: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization, or equivalently EBIT + D&A. It is widely used as a proxy for operating cash generation and as the denominator in EV/EBITDA valuation multiples. EBITDA strips out capital structure and accounting policy differences to allow apples-to-apples comparison across companies -- but it also excludes real cash costs like maintenance CapEx, making Adjusted EBITDA or EBITDA minus CapEx (sometimes called EBITDAC or simply unlevered FCF) a more honest measure for asset-intensive businesses.
Problem & Application
A campground reports: Net income $180,000; Interest expense $90,000; Income taxes $45,000; Depreciation $110,000; Amortization (of loan origination costs) $10,000. EBITDA = $180,000 + $90,000 + $45,000 + $110,000 + $10,000 = $435,000. If comparable campground properties trade at 8x EBITDA, the implied enterprise value is $3,480,000. However, the property requires $80,000 per year in routine maintenance CapEx to keep infrastructure operational. Adjusted for that, the 'owner earnings' figure is $355,000, implying a more conservative 9.8x multiple on actual cash generation -- a material difference in acquisition negotiations. Sellers naturally prefer the headline EBITDA multiple; buyers normalize for recurring CapEx. For SaaS businesses, EBITDA is less distorted by CapEx (which is minimal) and more directly reflects cash generation, making EV/EBITDA a cleaner valuation input in that context than for real-asset-heavy hospitality operators.
In Short
EBITDA is useful for comparing profitability but should be considered alongside other metrics like cash flow to evaluate a company’s true financial health.