Well here’s a mouthful for you, Earnings Before Interest Taxes Depreciation and Amortization! This amount, as the name suggests is the company’s earnings plus any interest, tax, depreciation amount and amortization expenses. The formula is operating profits plus depreciation and amortization. Wondering whether this number is actually useful for anything? Well, yes, EBITDA can serve as a substitute for the earning potential of a business and is often used in valuation ratios.
For example…
Let’s say Morning Fresh Orange Juice company’s revenue is $15 million. Their product cost and operating expenses add up to 6 million dollars. This gives them an operating profit of 7 million dollars. If their depreciation and amortization amounts add up to 2 million dollars, the EBITDA is operating profit plus depreciation and amortization which is 9 million dollars.
