EBITDA (pronounced E-Bit-Dah) is an acronym that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is an accounting term that represents exactly what it says it does. It is a measurement of the total amount of net revenue (earnings) before anything that might deduct from them is subtracted on a balance sheet.

Many companies use EBITDA as a measure of their fiscal well-being. If used properly, EBITDA should be one of the most accurate methods of determining how much money is flowing into the company before any accounting methods are applied, which might inflate or deflate the company’s earnings. It should be noted that EBITDA is just one side of the balance sheet and does not reflect capital expenditures, payments, etc.

EBITDA is useful as a measure of cash flow because of how it is calculated. In accrual accounting, it is possible to obfuscate how much money a company has brought in through a number of legal accounting principles. However, an EBITDA calculation removes many of these tools and provides a much more transparent number upon which to measure the health of the company.

Because of this transparency, stockholders like to see this number when determining whether they have made a good investment. Because of this, EBITDA is included in Securities and Exchange Commission filings; for instance, this one from Sirius XM Radio, Inc. or this one from Spheris.

However, there is one problem. EBITDA does not accurately measure a company’s profit because a true profit figure should take into account long term depreciation and capital expenditures. It also fails to include a number of factors that can reduce the amount of a company’s cash earnings including changes in working capital, granting of stock options and interest payments. Therefore, it is not a perfect accounting tool.