Chartered Financial Analyst (CFA) Practice Exam Level 2 - 2025 Free CFA Level 2 Practice Questions and Study Guide

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is a measure used to evaluate a company's operating performance. It focuses on the earnings generated from core business operations before accounting for the effects of capital structure (interest) and tax obligations.

The calculation of EBITDA starts with sales (or revenue) and deducts costs directly associated with production and operating expenses. This includes the Cost of Goods Sold (COGS), which represents the direct costs attributable to the production of the goods sold by the company. Additionally, while calculating EBITDA, depreciation and amortization are added back to operating profit. This is because EBITDA aims to provide a clearer picture of operational efficiency by excluding non-cash expenses like depreciation and amortization that impact net income.

The inclusion of sales, COGS, and the addition of depreciation and amortization accurately reflects the core operating earnings of a business, which is the purpose of EBITDA as a performance metric. Thus, selecting this combination in the calculation aligns with the definition and use of EBITDA in financial analysis.