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What does "EBITDA" stand for?
Earnings before Interest, Taxes, Depreciation, and Amortization.
What does that mean and why should it matter?
In basic terms, EBITDA is a measure of profitability for companies. So you really only need to know it if you 1. Own your own company, or 2. Are comparing companies to each other like when deciding which stock to buy.
EBITDA is used to compare companies between each other and let's you establish an industry average for what the EBITDA is for a good or bad company in that industry.
If a company was way bigger than another, it may be difficult to compare EBITDAs. That's why there's something called an "EBITDA Margin." This calculation just takes the EBITDA and divides it by the company's overall revenue.
So the EBITDA Margin gives you a percentage that indicates how profitable the company is on revenue. Let's take a look at an example. Company A has $100 Million in revenue and a $10 Million EBITDA. This means their EBITDA Margin is 10%.
Company B has $40 Million in revenue, but their EBITDA is $8 Million. This would make their EBITDA Margin 20%.
Even though Company A created more revenue and earned higher profits, the EBITDA Margin shows that Company B is actually operating more efficiently and profitably than Company A.
EBITDA is a good measure of profits since it removes outside factors and let's you create comparison between companies.
Often times, investors or businesses that are looking to buy a company will use the EBITDA to put a valuation on the company depending on the industry. They combine the EBITDA with an industry specific "multiple" to multiply to the EBITDA and get a valuation on the company.
If we use Company A again from our earlier example with a EBITDA of $10 Million, let's say the industry has an industry average multiple of 5. This would but a fair market value of $50 Million for the company.
The multiple will depend on the industry that the company is in. Some are very low like 1 or 2, while other industries' multiples are extremely high like 20 or greater. Generally higher multiples mean the industry has a lot of growth and higher profitability.
Now you know what these letters mean and don't have to pretend anymore! Follow for more plain easy analysis.
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