EBITDA (pronounced EE-bid-dah), is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure viewed by investors and bankers as a good indicator of future operating cash flow. Lenders like it because it can help them assess a company’s ability to repay its loans. Shareholders like it because it is a measure of cash earnings before the accountants have added in noncash expenses.
EBITDA is calculated by taking EBIT or Operating Profit from the Income Statement and adding back in the depreciation and amortization charges found on the Income Statement or Statement of Cash Flows.
(Excerpts from Financial Intelligence, Part Four Toolbox)
Several years ago, Wall Street’s favorite measure was EBITDA, or earnings before interest, taxes, depreciation, and amortization. Banks loved EBITDA because they believed it was a good indication of future cash flow. But then came a double whammy. During the dot-com boom of the late 1990s, companies such as WorldCom turned out to have cooked their books. So their EBITDA figures were not reliable. When the financial crisis hit in 2008, investors and lenders grew even more wary of any metric tied to the income statement. They realized that income statements are loaded with estimates and assumptions, and that profit shown on these statements is not necessarily real.