What it is:
How it works (Example):
The formula for
EBITDA = + + .
Let's take a look at a hypothetical income statement for Company XYZ:
To calculate EBITDA, we find the line items for EBIT ($750,000), depreciation ($50,000) and amortization (n/a) and then use the formula above:
EBITDA = 750,000 + 50,000 + 0 = $800,000
Using this information and the formula above, we can calculate Company XYZ's EBITDA margin as:
EBITDA Margin = $800,000/$1,000,000 = 80%
Because EBITDA is a measure of how much cash a company made in a .
Why it Matters:
is a way to evaluate a company's performance without having to in financing decisions, decisions or tax environments. In turn, the EBITDA margin provides more insight than a because the EBITDA margin minimizes the non-operating effects that are unique to every company. This gives investors a way to focus on operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry, or companies operating in different tax brackets.
However, EBITDA margin can also be deceptive when applied incorrectly. It is especially unsuitable for firms saddled with high net income in an effort to "window-dress" their profitability. That's because EBITDA almost always be higher than reported net income.loads or those who must frequently upgrade costly equipment. Furthermore, EBITDA margins can be trumpeted by companies with low
Also, because EBITDA isn't regulated by, investors are at the discretion of the company to decide what is, and is not, included in the calculation. There's also the possibility that a company may choose to include different items in their calculation from one reporting period to the next.