EBITDA (earnings before interest, taxes, depreciation, and amortization)

EBITDA starts from operating or net income and adds back interest, taxes, depreciation, and amortization: Net income + Interest + Taxes + Depreciation + Amortization. The goal is to approximate the cash-generating ability of a company's core operations before the effects of how it is financed, how it is taxed, and non-cash accounting choices about spreading asset costs over time.

EBITDA is not a measure defined under GAAP or IFRS, unlike gross margin or net income, so companies have latitude in what they add back. "Adjusted EBITDA" often strips out further items such as stock-based compensation or one-time restructuring charges, which can make the figure look considerably better than net income without those adjustments being wrong, just company-specific. It is also not the same as free cash flow, since it ignores capital expenditure and changes in working capital.

EBITDA matters because it lets analysts compare operating performance across companies with different capital structures, tax situations, and depreciation policies, and it is a common input to valuation multiples and loan covenants. The well-known misreading is treating EBITDA as equivalent to cash flow; a business can report strong EBITDA while still burning cash on capital spending or working capital needs that EBITDA does not capture.