Demystifying EBITDA: What is it?

The acronym EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.”

What sounds like accounting jargon is essentially a formula for calculating the basic earning power of a business. The Corporate Finance Institute states that EBITDA can be seen as “a proxy for cash flow from the entire company’s operations.”

Joseph Galante, CPA, writes that EBITDA came to prominence in the 1980s as “leveraged buy-out investors examined companies needing financial restructuring.”

The EBITDA formula provided a quick way to determine whether potential acquisitions could service interest payments on proposed debt-heavy deals.

However, leveraged buyout investors don’t deserve all the credit, as John Malone is also credited with bringing the term into the financial lexicon. Malone is known as “the king of cable,” an American billionaire who made his fortune in consumer telecommunications.

William N. Thorndike, Jr.’s book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (Harvard Business Review Press, 2012), recounts that Malone’s introduction of EBITDA into the financial lexicon “was a radically new concept, going further up the income statement than anyone had gone before to arrive at a pure definition of the cash-generating ability of a business.”

This is an excerpt from the most recent Produce Blueprints quarterly journal. Click here to read the full version.

Abigail Taylor is an assistant vice president of commercial lending at Wheaton Bank & Trust Company in Wheaton, IL (a Wintrust Community Bank) and has been with the company since 2012. She earned a business economics degree from Wheaton College in Illinois.