Overview

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is one of the most frequently used financial metric by finance professionals to assess a company's financial performance. Sometimes, it is used as a proxy for cash flow from a company's operations. EBITDA removes factors which business owners have discretion over, such as debt financing, capital structure, depreciation methods, and taxes. Thus, it allows companies to measure their performance without the impact of their capital structure. The formula for calculating EBITDA is as follows:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

or

EBITDA = Operating Profit + Depreciation + Amortization

The EBITDA metric can be used to provide an estimate on the value of a company by multiplying it by a valuation multiple (e.g. EV/EBITDA) obtained from equity research reports, comparable company analysis, or M&A precedent transactions.

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