Ebitda stands for earnings before interest, taxes, depreciation, and amortisation. Investors rely on Ebitda as a measure of operating cash flow because it excludes non-cash charges of depreciation and amortisation.
Because Ebitda does not include interest or tax expense, it allows comparability across companies without distortions from capital structure and tax rates.
A common valuation technique is comparing the ratio of enterprise value/Ebitda.
Ebitda is not a pure measure of cash flow because it does not account for changes in working capital or capital expenditures and cash interest expense and cash taxes. Ebitda often excludes one-off restructuring charges.
Analysts sometimes also use Ebitdar (earnings before interest, tax depreciation, amortisation and rent), which is useful for removing costs likely to be due to a different mix of operating leases.
Ebitda is generally seen to be more illuminating than using a simple price earnings ratio as a guide to value, because PE doesn't work for companies that are making a loss. Likewise, a price to sales ratio gives a measure of what revenues are worth, but is not useful in a fast-growing company. Enterprise value to revenue is also sometimes used in companies where analysts wish to take debt into account.
At the beginning of October 2013, Twitter filed a prospectus ahead of its initial public offering. Unusually, it used the term "adjusted Ebitda" which it defined as net loss adjusted to exclude stock-based compensation expense, depreciation and amortisation expense, interest and other expenses and provision (benefit) for income taxes. An FT writer commented that this meant it was basically excluding a chunk of worker compensation paid in shares, thereby flattering the figures. In the first six months of 2013, Twitter workers were paid $35m in shares and the company made $21m in adjusted Ebidta.