What is EBITDA, and why is it important?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a crucial financial metric used to evaluate a company's operational performance by focusing on earnings generated from core business operations, excluding the effects of capital structure (interest), tax rates (taxes), and non-cash accounting items (depreciation and amortization). This focus provides a clearer picture of a company's operational profitability and allows for easier comparison between companies within the same industry, regardless of their financing or tax situations.

By stripping away these variables, EBITDA serves as an indicator of a company's ability to generate cash flow from operations, which is vital for investors and stakeholders when assessing overall financial health and performance. This makes it a valuable tool for analysts and investors looking to compare companies on an equal footing or evaluate operational efficiency. The other definitions provided do not accurately capture the essence of EBITDA and its focus on earnings generated from operations, thereby illustrating why the choice that defines it as a measure of operational performance is the correct one.