EBITDA

Definition of EBITDA*: Earnings, but Imagine Truth Doesn’t Apply

EBITDA is often used by investors when analyzing a company for potential investment, and only the good lord above knows why. If one were to apply EBITDA in determining the affordability of a potential house, it might go something like this:

You, “Can I afford this $550k house? Let me see what my mortgage interest rate will be.”

EBITDA, “Don’t count that, it’s not important.”

You, “Okaaay. Well let’s see what my property taxes will be.”

EBITDA, “Kinda not that big of a deal.”

You, “Hmm. What if the housing market turns around and the house depreciates in value?”

EBITDA, “Borrrring.”

You, “Maintenance and upkeep, those are definitely costs I should calculate.”

EBITDA, “Ignore, ignore and irrelevant.”

You, “Well, since you put it that way, I guess I can afford this house.”

EBITDA, “Exactly.”

Critics of EBITDA point out that it’s a non-GAAP practice. “Oh great, more letters,” you may be thinking. But this one is easier: GAAP stands for Generally Accepted Accounting Principles; and EBITDA isn’t one of them.

*Actual definition of EBITDA: Earnings before Interest, Taxes, Depreciation, and Amortization