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What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is used to calculate a company’s financial performance, specifically, profitability or potential profitability, while excluding accounting and financing decisions that affect profits.

Some analysts are critical of EBITDA for a number of reasons. The main concern seems to be that while EBITDA provides a valid picture of one aspect of a company, it is sometimes used incorrectly. EBITDA excludes so much information that, if not used together with other calculations to get a complete picture of the financial position of the company, can hide key facts or mislead investors. For example, the calculation does not measure cash flow, since it doesn’t show changes in working capital. If a company were increasing its debt load over time, you wouldn’t detect it by calculating EBITDA. This method of calculation is not suitable for all industries, and it is not part of Generally Accepted Accounting Principles (GAAP). That doesn’t mean EBITDA is to be mistrusted as a measure. However, Like any other single measure of a company’s performance, EBITDA is a only a snapshot of one aspect of a company’s financial position, and should not be used on its own to make investment decisions.