DEFINITION of EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
And is a metric to evaluate a company’s operating performance.
WHAT IT IS IN ESSENCE
It can be seen as a proxy for cash flow from the entire company’s operations.
This metric is a variation of the operating income (EBIT). As a result, it excludes non-operating expenses and certain non-cash expenses.
The purpose of deductions is to remove the factors that business owners have discretion over. For instance, debt financing, capital structure, depreciation, and taxes.
Sometimes, it can be the showcase a firm’s financial performance. And without accounting for its capital structure.
It is a measure of a company’s net income also known as earnings or profit. But, minus any interest, taxes, depreciation, and amortization.
You can calculate EBITDA in two ways.
By adding depreciation and amortization expenses to operating income. Or by adding interest, tax, depreciation, and amortization expenses. Back on top of net income.
Here is the formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA = Operating Profit + Depreciation + Amortization
EBITDA is useful for comparing companies in different industries. Because such expenses and rates may be different. And to assess businesses that have high-value expenses. Above all, that can reduce net profits.
Most companies report ratings as part of their regular earnings releases.
SEC doesn’t accept this method as a measure. Because it is not in cooperation with generally accepted accounting principles. You may know this as GAAP.
The reason is that companies often reporting the rating in different ways.
HOW TO USE
EBITDA is an operating measure commonly used by financial analysts.
It allows analysts to focus on the outcome of operating decisions. While excluding the impacts of non-operating decisions. Let’s say, like interest expenses, tax rates. Also, large non-cash items like depreciation and amortization.
To clarify, EBITDA allows investors to focus on operating profitability as a singular measure of performance. Because it minimizes the non-operating effects, for example.
Such analysis is particularly important when comparing similar companies across a single industry. Or, in other words, companies operating in different tax brackets.
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