EBITDA

EBITDA starts from operating profit, also called EBIT, and adds back depreciation, the accounting charge for wear on physical assets, and amortisation, the equivalent for intangible assets. The result is meant to show operating profit before the effects of financing decisions, tax regimes and accounting choices about long-term assets, which makes companies with different debt levels and asset bases easier to compare. It is not defined by international or US accounting standards, so companies calculate and adjust it in different ways. It is widely used in the ratio of enterprise value to EBITDA and in loan agreements.

EBITDA's convenience hides real costs. Depreciation reflects money that has been, and will again need to be, spent on equipment, buildings and technology; ignoring it flatters capital-intensive businesses. Interest and tax are real cash obligations too. EBITDA also ignores changes in working capital, so it can differ widely from the cash a company actually generates. Companies sometimes promote an adjusted EBITDA that leaves out further costs they consider exceptional. Used with care, it is a helpful comparison tool; treated as a stand-in for cash flow or profit, it can seriously mislead.