EBITDA is an acronym that stands for: “Earnings Before Interest, Taxes, Depreciation, and Amortization.” In many instances, EBITDA serves as a measure of profits and financial performance for a business. It is sometimes a good replacement for net income.

Breaking EBITDA Down

Now, to truly understand EBITDA, you have to break it down entirely. Thankfully, the acronym makes this pretty easy. Let’s take a look:

Earnings: Money earned by the company
Before: This one is self-explanatory
Taxes: The money paid to the government by a company based on its tax rate
Depreciation: Decreases in the value of a company’s capital assets
Amortization: The cost of an intangible asset, spread out over time

EBITDA is a Heavily Used Comparison Too
When it comes to comparing businesses in a specific industry, many financial experts use EBITDA. It’s a commonly used profitability metric that allows financial experts to determine profitability among companies.

Using EBITDA has become common for measuring core profit trends. Why? Because of the way it eliminates extraneous factors. It’s also useful for finding more accurate comparisons between companies in similar industries.

Additionally, EBITDA works well as a starting point to estimate cash flow. This allows business owners and experts to determine a company’s ability to pay off long-term debts.