What is EBITDA?

What is EBITDA?

When business owners start delving into the world of accounting and finance, they’re often confused by the acronym EBITDA.

EBITDA stands for:

Earnings
Before
Interest,
Tax,
Depreciation and
Amortisation

It’s an international standard for the effectiveness of operations, and a calculation of operating profit - including all direct and indirect costs - before the business has paid corporation tax and any interest.

But it’s not a standard measure...

That said, in its full form, EBITDA isn’t a standard measure of profit when it comes to accounting – instead, we simply use EBIT; earnings before interest and tax.

It’s also referred to as operating profit and is a great way of measuring performance. It includes all direct costs of items sold and all business overheads, only excluding the tax and interest which are financing costs. It shows you how much money you’ve made from running your business on a day-to-day basis.

Why is depreciation and amortisation excluded?

In order to sanitise the data, depreciation and amortisation are excluded from the calculation for two reasons.

Firstly, two companies that are exactly alike could have different depreciation policies, and can’t be compared like-for-like.

Secondly, amortisation isn’t an allowable cost for corporation tax due to its subjective nature.

Therefore, by stripping these elements out, it ensures a completely objective view that allows a direct comparison of performance between businesses.

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