Translation: EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization (abbreviated as: earnings before deducting interest, taxes, depreciation, and amortization).

Simplified Definition: It is a financial metric that measures the pure operational profitability of the company and its ability to generate cash from its core activities only. In other words, it tells us how much cash the company has generated from its sales and daily operations, completely ignoring the impact of its financing structure (debts and interest), the impact of the government tax environment (zakat and taxes), and the impact of non-cash accounting expenses (depreciation and amortization). This metric is considered the gold standard for comparing core performance among companies in the same sector.

How is it calculated? Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) = (Net Profit) + (Interest Expense/Profit Sharing) + (Zakat and Taxes) + (Depreciation) + (Amortization).

Note: It can also be calculated from the top of the income statement: (Gross Profit) - (Cash Operating Expenses).

Note (Deduction Items):

  • Interest: The cost of loans and debts (which reflects a financing decision by management, not the efficiency of the activity itself).
  • Taxes/Zakat: Amounts paid to government entities (which are imposed outside the company's control).
  • Depreciation: The accounting reduction in the value of tangible assets over time (e.g., obsolescence of machinery, communication towers, vehicles).
  • Amortization: The accounting reduction in the value of intangible assets over time (e.g., spectrum licenses, software, patents).

Example: Suppose a telecommunications company achieved a "Net Profit" of 100 million riyals. However, upon reviewing its statements, we find that it paid 30 million riyals in loan interest, 20 million riyals in zakat, recorded 40 million riyals in depreciation for its networks, and 10 million in amortization for its licenses. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) = 100 + 30 + 20 + 40 + 10 = 200 million riyals. This means that the company's core activity (selling packages and services) actually succeeded in generating real cash of 200 million riyals before banks, taxes, and accounting depreciation intervened to reduce this figure.

What does it mean for you?

  • Positive and Growing Level: Indicates that the company's core business model is strong, efficient, and generates excellent cash flows sufficient to pay its debts, distribute dividends to shareholders, and reinvest in growth.
  • Declining Indicator or Being Negative: Represents an operational disaster; it means that the company is losing money just by conducting its activity (the cost of providing the service is higher than its revenues), even before paying a single riyal to the bank or taxes.

Sector Differences: The importance of this indicator varies significantly by sector. In "capital-intensive" sectors that require massive infrastructure and heavy equipment (e.g., telecommunications, aviation, factories, cement), depreciation and amortization are astronomical, distorting "Net Profit" and making it appear weak. Here, (EBITDA) is the most important indicator for evaluating the company. In contrast, in light service or technology sectors (e.g., consulting or simple software companies), depreciation is almost nonexistent, so (EBITDA) is very close to net profit, and its importance as an independent indicator diminishes.

Common Question: Why do financial analysts prefer to evaluate companies or acquire them based on the (EBITDA) indicator instead of the final "Net Profit," despite warnings from major investors (like Warren Buffett) against using it?

Answer: Analysts like it because it allows for "apples-to-apples" comparisons. If we have two companies (A) and (B) with the same management and the same sales, but company (A) took on massive loans while company (B) is debt-free, then company (A)'s "Net Profit" will be much lower due to interest. EBITDA removes the impact of debt to show the investor that both managements are operating with the same operational efficiency.

As for Buffett's warning: He believes that (EBITDA) hides a real cost. Buffett sarcastically says, "Does management think the tooth fairy will pay for the cost of buying new equipment when the old one breaks down?" Depreciation may be an "accounting expense" today, but machines will wear out someday and will require "real cash" to replace them, and ignoring that gives an overly rosy picture of the company's wealth.