What it is
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.
It starts from operating income and adds back two non-cash accounting charges:
- Depreciation — the slow write-down of physical assets (machines, buildings).
- Amortization — the same idea for intangibles (patents, software).
Why people watch it
Depreciation and amortization are real costs eventually — you do have to replace machines. But they don't move cash this period. EBITDA strips them out to give a quick sense of how much cash the operations throw off.
It's popular for comparing companies with different debt loads or different capital intensities — but it isn't a perfect substitute for real cash flow (see Free Cash Flow).