EBITDA Explained: A Key Financial Metric in the Share Market

EBITDA — short for Earnings Before Interest, Taxes, Depreciation, and Amortization — is one of the most frequently used financial metrics in the share market. It offers a clearer picture of a company’s operational profitability by stripping away costs that may not reflect its core performance.

This article explains what EBITDA is, how it’s calculated, and why investors and analysts rely on it to assess business health and valuation.

Key Takeaways

• EBITDA measures a company’s core operating profitability without considering financing and accounting decisions.
• It's commonly used in valuations and comparisons between companies in the same sector.
• EBITDA is not part of GAAP or IFRS standards and should be used alongside other financial metrics for a fuller picture.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It reflects a company’s profitability before accounting for non-operational costs and non-cash expenses.

Put simply, it focuses on how much money a company makes from its operations.

How Is EBITDA Calculated?

The basic formula is:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Alternatively, you can start from operating income:

EBITDA = Operating Profit (EBIT) + Depreciation + Amortization

By adding back depreciation and amortization to operating profit, EBITDA neutralizes the effects of investment in tangible and intangible assets.

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Why Is EBITDA Important in the Share Market?

1. Strips Out Irregular Costs
   It removes financial and accounting items that vary widely between businesses, allowing investors to better compare profitability.
2. Helps in Valuation Multiples
   Metrics like EV/EBITDA are widely used in valuing public and private companies, especially in M&A deals.
3. Shows Core Earnings Power
   For companies with high capital expenditures or varying tax strategies, EBITDA helps highlight the underlying business performance.

Limitations of EBITDA

While EBITDA is useful, it has its drawbacks:

• Not a measure of cash flow — It ignores capital expenditures and working capital changes.
• Can be manipulated — Companies might emphasize EBITDA to mask poor net income.
• Doesn’t reflect interest or tax obligations — Important factors for leveraged businesses.

When Should You Use EBITDA?

EBITDA is particularly useful when:

• Comparing companies in capital-intensive industries
• Analyzing early-stage companies with large depreciation costs
• Evaluating businesses before acquisition or merger

However, it’s best used in conjunction with other metrics such as net income, free cash flow, and return on equity.

FAQs

What’s the difference between EBITDA and net income?

Net income accounts for all expenses, including interest, taxes, and depreciation. EBITDA excludes them to focus purely on operational earnings.

Is a higher EBITDA always better?

Generally, yes. But context matters — EBITDA must be compared with peers and viewed alongside margins and growth rates.

Why do investors like using EBITDA?

It allows for a cleaner comparison between companies by focusing on operating performance and excluding non-core financial factors.