EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used to determine the operational cash flow and serves as a key comparable metric for different countries and companies.
To calculate EBITDA, a company takes its revenues and subtracts the cost of goods sold and selling, general, and administrative expenses (SG&A).
EBITDA = Net Income + Taxes + Interest + Depreciation & Amortization
An important aspect is normalized EBITDA. As mentioned, the purpose of EBITDA is to provide a comparable estimate of a company’s cash flow. However, throughout a fiscal year, there can be write-offs, restructurings, and other one-time costs. These one-time costs should be excluded to make EBITDA comparable. These adjustments can include the following:
- Other income
- Write-offs/Impairments
- Restructurings
- Capital expenditures
- Other non-recurring expenses
EBITDA is one of the fundamental metrics used in the M&A industry. In most situations, EBITDA determines the value of your company based on comparable industry multiples. The most commonly used multiple today is EV/EBITDA.61