EBITDA

Another important topic to know and understand is related to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Interview Question: 'How do you calculate EBITDA?'

First Way

EBITDA = Revenue - Expenses (excluding interest, taxes, depreciation and amortization)

or

Second Way

Sales
- CoGs
---------
Gross Margins
- Operating Expenses
---------
EBIT
+ DA (Depreciation & Amortization)
---------
EBITDA

Both of these calculations are done using the information provided on the Income Statement.

Interview Question: 'Why is this number important?'

"EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next." Source: Investopdedia


This number is often confused with cash flow, but there are some very important differences. Thus, the key to remember is that EBITDA does not represent cash flow, but rather the profitability of a company. Read the following article found on Investopedia's website to get a more in-depth look at this calculation and some of its potential shortcomings: Challenging the Calculation


Here is another source found on Wikipedia:
Wikipedia: EBITDA


EV/EBITDA

Another important related interview question that is likely to follow is to 'Suggest a multiple you would use when valuing a company.' A great multiple to use is EV/EBITDA because it represents the cash a company has that is available to both debt and equity holders.

Interview Question: What is EV and how do you calculate it?

EV = Enterprise Value

Enterprise Value = Market Cap + net debt (net debt = total debt - cash & equivalents)

Check out this link to find out more about this important multiple: Wikipedia: EV/EBITDA