EBITDA

EBITDA means earnings before interest, taxes, depreciation and amortisation. It starts with revenue and subtracts operating expenses other than those four categories, providing a view of operating earnings before financing, tax jurisdiction and selected non-cash accounting charges.

When to use it

• Answer the key performance question: “To what extent are we operating our business efficiently to generate profits?”
• Assess this KPI within the Financial perspective.
• Plan data collection, formula use, reporting frequency, and data-source requirements for this KPI.
• Compare results against the targets, benchmarks, examples, or trend guidance available for this KPI.

Origins

EBITDA became prominent during the leveraged-buyout boom of the nineteen eighties, when lenders and dealmakers wanted a rough measure of operating earnings before financing cost and large non-cash charges. It is not defined by IFRS or US GAAP, and “adjusted EBITDA” can differ materially among companies. Its origin explains both its usefulness in comparing capital structures and its central limitation: it is not cash flow.

What it is

Perspective: Financial perspective.

Key performance question: To what extent are we operating our business efficiently to generate profits?

EBITDA removes interest, tax, depreciation and amortisation from the operating result. It can help compare businesses with different financing choices, tax positions and asset-accounting charges.

The measure is particularly prominent in asset-heavy companies with substantial depreciation and acquisitive companies carrying amortising intangible assets. Removing those charges may clarify operating differences, but it also hides the economic cost of maintaining productive assets. Interest, tax and working-capital needs remain real cash claims even when the metric excludes them.

How to use it

Measurement