What is EBITDA? Why Analysts Use EBITDA to Measure Profitability

EBITDA strips away non-operating items to show core business earnings.

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization. It measures a company's operating profitability by stripping out financing decisions (interest), government policy (tax), and accounting choices (depreciation and amortization). It approximates the cash profit from core operations.

If a company earns Rs.100 crore net profit, pays Rs.30 crore interest, Rs.25 crore tax, and has Rs.20 crore depreciation, EBITDA is Rs.175 crore. This number shows what the business earned before paying for its capital structure and non-cash charges.

EBITDA = Net Profit + Interest + Tax + Depreciation + Amortization

If Net Profit Rs.500 Cr, Interest Rs.100 Cr, Tax Rs.150 Cr, D&A Rs.200 Cr: EBITDA = 500 + 100 + 150 + 200 = Rs.950 Cr

Why do analysts prefer EBITDA?

EBITDA removes the effects of financing (interest), jurisdiction (tax), and accounting policies (depreciation). This allows fair comparison between companies with different debt levels, tax situations, and depreciation methods. It focuses purely on how well the business operates.

What are the limitations of EBITDA?

EBITDA ignores capital expenditure, which is a real cash cost for businesses. A telecom company spending Rs.10,000 crore on network buildout has much less actual cash than EBITDA suggests. EBITDA also ignores working capital changes. Never use EBITDA as the sole profitability measure.

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