EBITDA is a form of profit. Whenever someone says they made X in profit - you should immediately ask what kind - net income, operating profit, etc. Depending on the business, different definitions of profit can produce wildly different numbers.
It's a generally accepted proxy for cash earnings since it looks at profit and takes out:
- non-operating costs such as interest and tax. These are "non-operating" because they have nothing to do with delivering your service/product.
- non-cash costs such depreciation and amortization.
It is worth noting that EBITDA is non-GAAP, which is to say that it's not an officially recognized accounting term. You won't see it in an audit and if you do there will be a big disclaimer next to it. The term gained popularity in the 80s with the rise of private equity. It's used in debt agreements to approximate how a business will pay back loan principal and interest.
It's a generally accepted proxy for cash earnings since it looks at profit and takes out:
- non-operating costs such as interest and tax. These are "non-operating" because they have nothing to do with delivering your service/product.
- non-cash costs such depreciation and amortization.
It is worth noting that EBITDA is non-GAAP, which is to say that it's not an officially recognized accounting term. You won't see it in an audit and if you do there will be a big disclaimer next to it. The term gained popularity in the 80s with the rise of private equity. It's used in debt agreements to approximate how a business will pay back loan principal and interest.