Definition of earnings before interest, tax, depreciation and amortisation
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.
ebitda in the news
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.
