What is EBIDTA? Why is it so Important?

EBITDA is an abbreviation that stands for earnings before interest, taxes, depreciation and amortization. EBITDA is an approximate measure of the cash flow available to the owner of a business prior to capital expenditures, working capital and debt-servicing requirements and income taxes. Other measures of earnings include: net earnings, net earnings before income taxes, EBIT (earnings before interest and taxes), and pre-tax discretionary cash flow.

EBITDA is important because it is often a key determinant of business value. A capitalized EBITDA approach to valuation (a commonly used pricing approach particularly in medium to large transactions) involves applying a multiple to a company’s normalized EBITDA to arrive at an enterprise value. The company’s outstanding debt is then deducted from the enterprise value to arrive at the value of the company’s shares. All else being equal, the higher a company’s EBITDA, the higher the price that the company will command in the marketplace.

 

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