Earnings Before Interest, Taxes, Depreciation, And Amortization

Imagine you're running a startup. At the end of the month, you want to see how much money your business made from its core operations, without getting distracted by other financial factors. EBITDA helps you do just that.

1. Earnings: This is the total money your startup brings in. Think of it as the top line of your income statement, which is often your sales or revenue.
2. Before Interest: When you borrow money, you pay interest. But interest payments don't tell you how well your core business is doing. So, we set that aside for now.
3. Taxes: Every business pays taxes. But tax amounts can vary based on many factors outside of your business's performance, like government policies. Again, to focus on how your business is doing, we'll ignore taxes for now.
4. Depreciation: Over time, assets like machinery or computers lose value. This loss in value is called depreciation. It's a non-cash expense, meaning you're not actually paying out money. Since we're interested in understanding the cash-generating ability of your operations, we add back this value.
5. Amortisation: This is similar to depreciation but for intangible assets like patents or copyrights. Again, it's a non-cash expense, so we add it back to get a clearer picture of your business's performance.

In essence, EBITDA gives you a snapshot of your startup's profitability from its core operations, without getting muddled by interest, taxes, and non-cash expenses. It's like looking at your business through a lens that filters out the noise, allowing you to focus on the core tune.

However, it's worth noting that while EBITDA is a useful metric, it doesn't give a complete picture of a company's financial health. It's one of many tools in the toolbox, and it's essential to consider other financial metrics and factors when making decisions.