EBITDA is earnings before interest, taxes, depreciation and amortization, a measure of a business's core operating profitability.
EBITDA strips out financing costs (interest), tax, and non-cash accounting charges (depreciation and amortization) to show how much cash a business's core operations generate before those items. It is widely used to compare companies and, in particular, to value a business for sale, often as a multiple of EBITDA.
Because it removes depreciation and amortization, EBITDA is not a measure of true cash flow, it ignores capital spending and working capital needs, and it is not a defined figure under IFRS or ASPE. It is a useful comparison tool, but buyers and lenders adjust it (often to "normalised" or "adjusted" EBITDA) for owner-specific costs.
A business with $500,000 net income, $80,000 interest, $120,000 tax, and $100,000 depreciation and amortization has EBITDA of $800,000. A buyer valuing it at 4x EBITDA would offer around $3.2 million before adjustments.
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