What does EBITDA stand for, and what is its purpose?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Its main purpose is to measure a company's operating performance by focusing on earnings generated from core business operations, excluding the effects of capital structure, tax rates, and non-cash expenses like depreciation and amortization.

This metric provides a clearer understanding of a company’s ability to generate profit from its operational activities, making it a valuable tool for investors and analysts assessing the underlying performance of a business. It allows for comparison between companies and industries by normalizing these aspects, which can otherwise distort profitability figures.

The emphasis on operating performance is crucial as it indicates how well a company can generate earnings from its primary operations before accounting for external factors.