Earnings before the deduction of interest, taxes, depreciation, and amortization. It is a non-GAAP calculation based on data from a company's income statement used to measure a company's operating profitability. Because EBITDA adds back to net income the non-cash accounting charges of depreciation and amortization and disregards interest paid on debt financing and income taxes on earnings, it is useful for measuring a company's operating cash flow and for comparing the profitability of companies with different capital structures and in different tax brackets. However, EBITDA does not measure, and should not be confused with, the actual cash flow of a company which accounts for interest paid on debt financing, income taxes, and other cash charges.

EBITDA is an important measure in many lending transactions because it is used by lenders to estimate the cash flows that a company has available for principal and interest payments. In particular, in leveraged transactions such as a leveraged buyout, the amount of debt financing provided by lenders is often based on a ratio of debt to EBITDA (referred to as leverage multiples). EBITDA is also used in the financial covenants found in loan agreements. However, the definition of EBITDA is often negotiated in loan agreements to include numerous carve-outs and add-backs to the basic definition depending on the parties' business agreement. For example, the amount of cash that is used to fund working capital and replacement of old equipment or other capital expenditures is not included in (or subtracted from) EBITDA.

EBITDA is also an important measure in valuing mature private businesses. The valuation of a business is often calculated as a multiple of EBITDA (with the applicable multiple determined based on the company's industry) because it allows a comparison of valuations of companies in the same industry but with different capital structures.

For more on financial covenants in loan agreements and the use of the measure of EBITDA, see Practice Note, Loan Agreement: Financial Covenants and Standard Clauses, Loan Agreement: Financial Covenants.