UK Accounting Glossary
EBITDA or “earnings before interest taxes depreciation and amortization” is a commonly used measure of cash flow. EBITDA can be calculated “top-down” by adding back DDA or depreciation and amortization deducted as sales costs to operating income before interest and taxes. EBITDA can also be calculated “bottom-up” by adding interest and DDA back to pretax income. For example, to find EBITDA, if the income statement shows $2 million of pretax income and DDA is $12 million and interest expense $6 million, then EBITDA is $20 million. EBITDA became a standard tool for measuring cash flow leverage for LBOs in the 1980s. An EBITDA/debt ratio at a 2x multiple was considered the limit of safe leverage. EBITDA is often the cash flow measure most often associated with profitability comparison between investments. For example, enterprise value/EBITDA provides a valuation multiple of all of a company’s debt and equity times its cash flows. EBITDA is not a GAAP approved accounting measure because EBITDA neutralizes the effects of a company’s financing and accounting decisions.
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This glossary post was last updated: 9th February 2020.