Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is one of a few profit metrics. At its simplest, EBITDA focuses only on operational profitability, ignoring non-cash expenses by adding them back to Net Income.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
If a company has:
$50 million in Revenue
$10 million in Costs of Goods Sold (COGS)
$15 million in Operating Expenses
$5 million Depreciation and Amortization Expense
$2 million in Interest Expense
$3 million in Taxes
Net Income = 50 - 10 - 15 - 5 - 2 - 3 = $15 million
EBITDA = $15 + 2 + 3 + 5= $25M
There are many way to visualize EBITDA, but bar charts and line charts are the most common data visualizations associated with this metric. A bar chart can help you quickly identify high-performing years while a line chart helps you view changing trends over time.
EBITDA is used by executives as an indicator of a company's financial value and often serves as a proxy for understanding a business’ earning potential. It’s an effective way for founders and investors to compare two similar companies within the same industry. You need to be cautious when using EBITDA as a measure of success because it doesn’t properly account for the cash available to the business.
For example, it does not take into consideration the timing between when costs are incurred in the making of a product and when revenue is generated from its sale. By definition EBITDA ignores the interest and taxes a company must pay as well as the costs associated with depreciation and amortization of past investments.
