In short
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a widely used measure of operating performance that leaves out financing, tax and noncash asset charges.
Key takeaways
- It isn't defined by generally accepted accounting principles, so public companies presenting it must follow the rules for non-standard performance measures.
- It ignores capital spending and working capital needs, so it overstates cash generation.
- Lenders often use it in covenants, such as maximum debt to EBITDA.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with a current ratio of 0.8 uses cash to pay off an accounts payable balance. What is the effect on the current ratio?