EBITDA

How is this different from normal earnings?

It’s an acronym for “earnings before interest, taxes, depreciation, and amortization.” By definition, this will always be larger than “normal” earning figures, which subtract those four things.

EBITDA measures the health of a company’s operating business, meaning the things it actually produces to make money.

A company might have a healthy operating business, but be saddled with huge interest payments, or be located in a high-tax area. These things would drag down actual earnings, so earnings would be negative, but EBITDA would be positive. This represents that the basic business model is viable, there are just outside factors that are affecting earnings.

However, if EBITDA is in the negative (and therefore earnings would be also), then the business has foundational problems with its business model.

Why I Looked It Up

I work for a software company that’s been doing a lot of mergers and acquisitions. It comes up a lot. I knew what it was in general terms, but not why it mattered, or how its difference from earnings was important.

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