Benefits of EBITDA

What is EBITDA?

EBITDA, or Earnings before Interest, Taxes, Depreciation, and Amortization, is a different measure of profitability than net income. EBITDA, which includes depreciation and amortization as well as taxes and debt service expenses, seeks to depict the cash profit created by the company’s activities. EBITDA is not a GAAP-recognized number. Some public firms provide EBITDA in their quarterly results as well as adjusted EBITDA statistics, which often exclude extra expenditures such as stock-based compensation. The increased emphasis on EBITDA by firms and investors has sparked criticism that it overstates profitability....

Why EBITDA?

1. Management: EBITDA measures how successfully a firm manages its day-to-day operations, including key costs like the cost of goods sold. As such, it provides a fairly accurate picture of a company’s current health and prospects. In certain circumstances, it is more equitable than gross profit or net income....

EBITDA Formulas

If a corporation does not declare EBITDA, it is easy to calculate using its financial statements. Calculations may be made easier with software such as Excel. The income statement includes earnings (net income), taxes, and interest, whereas depreciation and amortization statistics are often found in the notes to operating profit or on the cash flow statement. There are two EBITDA estimates, one based on net income and the other on operating income, and both provide about the same result....

Example of EBITDA

Calculate EBITDA from the following items in a company where,...

History of EBITDA

EBITDA was invented by Liberty Media Chairman John Malone, one of the few investors with a track record that rivals Buffett’s. The cable industry pioneer developed the statistic in the 1970s to assist lenders and investors understand his leveraged expansion plan, which used debt and reinvested revenues to reduce taxes....

Benefits of EBITDA

1. Earning Potential: It can provide information about the company’s earnings potential. It is an important metric for attracting potential buyers and investors. The EBITDA figure allows investors to calculate the return on their investment in the firm....

Criticisms of EBITDA

1. Inclusion of Depreciation: Depreciation is considered while calculating earnings before interest and taxes. When comparing data from various sectors, depreciation discrepancies will occur. For example, if a person compares the earnings before interest and taxes of a company with a significant amount of fixed assets to those of a company with few fixed assets, the company with fixed assets will have lower earnings before interest and taxes because the expense reduces net income or profit....

EBITDA vs. EBIT vs. EBT

Basis EBITDA EBIT EBT Definition Profit excluding interest, taxes, depreciation, and amortization expenses. Profit excluding interest and tax expenses. Profit excluding tax expenses. Formula Revenue – COGS – Operating Expenses + Depreciation + Amortization Revenue – COGS – Operating Expenses Revenue – COGS – Operating Expenses – Other Expenses + Other Income Operational Insight A rough measure of profitability is calculated by adding back depreciation and amortization to EBIT. A measure of operating profitability excluding finance expenses. A look at profitability before taxes. Degree of Separation from Net Income/Profit Excludes finance, taxes, and capital depreciation from operating profits. Excludes the impact of finance and taxes on operating profitability. Closer to net income, excluding taxes. Uses and Applications Valuation, investor analysis, and company comparison, excluding financing and tax effects. Operational analysis, valuation, and corporate comparison. Examining profitability and tax approaches. Tax Impact Ignores the effect of taxes, financing, depreciation, and amortization on operating earnings. Ignores tax and finance implications in favor of operational earnings. Emphasizes the impact of taxes, not finance, on total earnings....

EBITDA vs. Operating Cash Flow

1. Operating cash flow is a better measure of a company’s cash generation since it adds non-cash expenses (depreciation and amortization) to net income while also accounting for changes in working capital, such as receivables, payables, and inventories, that use or produce cash....

EBITDA – FAQs

What is EBITDA?...