EBITDA, (or Earnings Before Interest, Taxes, Depreciation and Amortization), is an accounting term that is an alternative way to measure a company’s profitability.
EBITDA is simply an acronym:
To calculate EBITDA, you start with Net Income (also known as Earnings). Then you add back Interest, Taxes, Depreciation, and Amortization
EBITDA is a Non-GAAP number, meaning it doesn’t comply with “Generally Accepted Accounting Principles” For that reason, you won’t see it on many companies’ financial statements. However, some management teams do provide it and focus on it heavily.
Amortization & Depreciation are the accounting process of writing down the value of an asset over time:
- Depreciation is the accounting method used to allocate the cost of a TANGIBLE asset over its useful life. A TANGIBLE asset is something you can physically touch (house, car, factory). Depreciation represents how much of a tangible asset’s value has been “used up”.
- Amortization is the accounting process of writing down the value of a loan or an INTANGIBLE asset. It’s VERY similar to depreciation, but amortization happens to “Intangible” assets, which are assets that you can’t physically touch (patents, trademarks, goodwill).
Although Wall Street might love EBITDA, many investors do not. Why? EBITDA can be very misleading. Ignoring “depreciation” as an expense is a big reason why, as Buffett explained in 2017.
References:
Investment strategy is to buy and hold for the long-term high-quality companies, and then let compounding work its magic.