EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation; pronounced ‘EeBitDaa’. The word ‘Earnings’ in this definition basically means Profit – the surplus money generated by the business; the word ‘Before’ in Earnings Before Interest, Tax, Depreciation and Amortisation, just means ‘without including’, so EBITDA means ‘Earnings Without Including Interest, Tax, Depreciation and Amortisation’
In our explanation of EBIT we explained how in financial accounting we often want to exclude Interest and Tax from our analysis of a Profit & Loss statement.
Depreciation and Amortisation are other costs, called ‘non-cash costs’, that we may want to exclude from our consideration of the Profit and Loss statement because they are allocated costs from investments that were incurred at some time in the past. Depreciation and Amortisation are more advanced financial concepts. See the Quick Reference Post on Capital Expenses, as well as Depreciation and Amortisation for more details.
EBITDA is often considered a useful measure of financial performance because it shows the cash generated by a business and isn’t confused by accounting allocations, interest or tax.