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Finance Glossary

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Over 700 finance terms, Shmooped to perfection.



Earnings Before Interest, Taxes, Depreciation, and Amortization.

Seems like a five-eyeballed purple fish out of a nuclear plant river. Why on earth would anyone track this arcane piece of financial data?

Well, in theory, EBITDA strips out noise—noise that isn't germane to the business being analyzed. The idea is that EBITDA takes out information about financing and accounting differences, so it's easier to compare companies. Investors use this number to figure out whether a company is a good investing bet or not. EBITDA can be useful, but it can also be fudged—just like any other financial data. 

The notion was popularized by high cap ex industries (like the cable industry) which generated very high unit margins but never had any capital available to give back to shareholders because the industry was busy buying content and itself (i.e. consolidating). Many investors liken EBITDA to "cash flow" as a proxy for the unfettered operational cash earning power of the entity itself.

The dotcom meltdown of the early 2000s happened in part because the EBITDA numbers for dotcom companies were great... even though that didn't stop those companies from flopping. EBITDA can make companies with a lot of debt look far more promising than they are, so always check more than EBITDA when deciding what to invest in, kay?