EBITDA and EBITA

Analysts and investors always want a reliable measure of profits that’s not unduly subjective and is close to a firm’s cash flows. Earnings before interest, tax, depreciation and amortisation (EBITDA) tries to achieve this by taking operating profit and adding back two subjective costs: depreciation and amortisation. These are fairly arbitrary charges made to reflect the wearing out of fixed assets over their ‘useful economic lives’.

This life is determined by the directors, based on how long they think an asset will generate income. But critics of EBITDA say that in a capital-intensive industry it is misleading to take out fixed (long-term) asset costs altogether.

Enter EBITA – operating profit (earnings before interest and tax) with amortisation (of intangible assets, such as goodwill and patents) added back. Depreciation is left in as an estimate of the annual cost of replacing a firm’s fixed assets.

• See Tim Bennett’s video tutorial: Beginner’s guide to investing: the EV/EBITDA ratio.

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


24 November 1972: the 'DB Cooper' hijacking

Today in 1972, a man calling himself Dan Cooper parachuted from a hijacked Northwest Airlines Boeing 727 with $200,000 in cash. He has never been found.