EBITDA KPI stands for earning before interest taxes depreciation and amortization key performance indicator. This metric asks the question to what extent are we operating our company efficiently to generate profits.

An income statement has revenues and expenses. Four of those expenses are interest, taxes, depreciation and amortization. We are taking sales revenues and subtracting all of the expenses except for the above mention four. These four are removed because they can distort our perception of how well the company is being managed. Interest expenses reflect the interest rate and how the company is financed. Also, we don’t want to factor in a sudden change in taxes or tax rates. Depreciation can be high on new equipment.

EBITDA allows us to better compare one company to another without taking into account capital structure. EBITDA was first used in the 1980’s and has become very popular, particularly with companies with large amounts of assets and depreciation. Here is the formula.

EBITDA is not cash earnings and should always be used with other KPIs to get a more full picture of financial performance. EBITDA is a non-GAAP measure.

EBIT

Another similar KPI is EBIT, which is earnings before interest and taxes.

For more information, The Main KPI Types has a list of some KPIs and their types.