EBITDA is an acronym for Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA is computed by taking the net income from the income statement and adding back the deductions for interest, taxes, depreciation and amortization. Over the past two decades EBITDA has become an fixation among stock analysts and corporate managers. Many texts and financial analysts promote it as a short-cut method to determine cash flow based on the fact that depreciation and amortization are non-cash expenses. However, caution is recommended because in most cases, EDITDA does not represent cash flow accurately.
In essence, EBITDA fails to measure true cash flow because its computation ignores the balance sheet. Specifically, EBITDA neglects the following considerations:
Debt payment on principal can be substantial for property and equipment for intensive operations such as hotels and large restaurants. Rapidly growing companies and new ventures require huge amounts or debt or cash expenditures. Capital expenditures are ongoing outlays for almost every successful company. Even if these capital expenditures are financed, such arrangements require the payment of debt.
Another theoretical short-cut method to measure cash flow is free cash flow (FCF). In its most simplest form, FCF is simply cash from operations minus capital expenditures. However, free cash flow is also not accurate as a measure of cash flow because it also neglects the cost of debt.
Why Has EBITDA Been So Popular?
Many large firms use EBITDA because it makes earnings look more favorable
It can be an effective method to measure and compare management performance of competing companies because EBITDA excludes the effect of interest and tax expenses, the depreciation of long-term assets; all of which may differ among competing companies.
EBITDA can produce a more accurate picture of the longer-term economics of businesses whose assets are likely to appreciate in the future.
EBITDA is highly questionable as a valid measure of performance or its use to make critical management decisions.
EBITDA is not recognized or approved as a measure of performance by Generally Accepted Accounting Principles (GAAP).
EBITIDA and EBITDA are different terms for the same measurement. Some textbooks have modified the term, probably for pronunciation purposes. However, EBITDA is the original term an internet search validates the current use of EBITDA, especially when a search on EBITIDA yields little to no results.