EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's core operating profitability — what it earns from actually running the business — with the effects of financing decisions (interest), tax jurisdiction, and non-cash accounting choices (depreciation and amortization) stripped out.
The formula
Why investors and buyers use it
Because EBITDA excludes financing and accounting choices that vary company to company (one business might lease its equipment, another might buy and depreciate it — EBITDA makes them comparable), it's the standard basis for company valuation multiples in private equity and M&A. "This company trades at 8× EBITDA" is a common shorthand for what a business is worth relative to its core operating profit.
EBITDA is not cash flow
A common mistake is treating EBITDA as if it were cash in the bank. It ignores capital expenditure, changes in working capital, and debt payments — a company can have strong EBITDA and still run out of cash if it's spending heavily on equipment or growth.