EBITDA

Knowledge Center

   

Earnings Before Interest, Taxes, Depreciation and Amortization. Explanation EBITDA.

Contents

  1. Summary
  2. Forum
  3. Expert Tips
  4. Resources

  Print


Earnings Before Interest, Taxes, Depreciation and Amortizati?

Why register?

What is EBITDA? Description

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. EBITDA came into wide use among private capital firms, wanting to calculate what they should pay for a business.


Calculation of EBITDA. Formula


      Net Sales

-     Operating Expenses

------------------------------------------------------

      Operating Profit (EBIT)

+    Depreciation Expenses

+    Amortization Expenses

------------------------------------------------------

      EBITDA


Using EBITDA

The private capital firms that originally employed EBITDA as a useful valuation tool removed interest, taxes, depreciation, and amortization from their earnings calculations in order to replace them with their own presumably more precise numbers:

  • They removed Taxes and Interest because they wanted to substitute their own tax-rate calculations and the financing costs they expected under a new capital structure.
  • Amortization was excluded because it measured the cost of intangible assets acquired in some earlier period, including goodwill, rather than any current expenditure of cash.
  • Depreciation, an indirect and backward-looking measure of capital expenditure, was excluded and replaced with an estimate of future capital expenditure.

Later, many public companies, analysts and journalists have urged investors to also use EBITDA to measure the cash which public companies generate. EBITDA is often compared with cash flow, because it rightfully adds back to net income two major expense categories that have no impact on cash: depreciation and amortization.


Why EBITDA can be misleading

Yet EBITDA is a very poor and even misleading mechanism if it is used to approximate cash flows of public companies! Why?

  1. It excludes taxes and interest, which are real cash items and not at all optional. A company must of course pay its taxes and loans.
  2. It does not exclude all non-cash items. Only depreciation and amortization are excluded. Among the non-cash items not adjusted for in EBITDA are bad-debt allowances, inventory write-downs, and the cost of stock options granted.
  3. Unlike proper measurements of cash flow, EBITDA ignores changes in working capital. Additional investments in working capital consume cash.
  4. Finally, the main flaw of EBITDA is in the E (Earnings). If a public company has over- or under-reserved for warranty costs, or for restructuring expenses, or for bad-debt allowances, its earnings will be skewed. Its EBITDA will be misleading. If it has recognized revenue prematurely or disguised ordinary costs as capital investments, its reports are suspect. If it has inflated revenue through round-trip asset trades, the E is of no informational value.

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide -

Book: Ciaran Walsh - Key Management Ratios -




Earnings Before Interest, Taxes, Depreciation and Amortizati Forum (5 topics) Help
To get access to this forum, you need to be a member: Please log in... | Register
  Calculate the EBITDA on a US GAAP basis
Can anyone help me? I need to calculate the EBITDA on a US GAAP basis, i'm using Mexican GAAP. Is there is a diferent formula to calculate it?...
     
 

The meaning of the A in EBITDA

In this topic EBITDA I understand EBITD but what is the meaning of the A ?...
     
 

EBITDA helps in merger and acquisition

Just to shed some light on EBITDA and EBIT, they help in merger and acquisition as they reveal the earning capacity of a company....
     
 

EBITDA for Aluminium Manufacturer

Can anyone please suggest me how do we calculate EBITDA for aluminium manufacturing company? Or is it correct to say quantity*NEP-total cost=EBITDA?
WHERE NEP=net effective premium.....
     
 

EBITDA growing in Europe

A recent PwC survey based on analysis of 2,800 European financial statements found the following slightly growing percentages of companies of using EBITDA or similar measures (EBITA, EBITAE and EBITDAE - last E is Exceptionals) in the financial state...
     
Start a new discussion: Please log in... | Register



Earnings Before Interest, Taxes, Depreciation and Amortizati Special Interest Group


Special Interest Group

Earnings Before Interest, Taxes, Depreciation and Amortizati Education & Events


Find Trainings, Seminars and Events


Expert Tips - Earnings Before Interest, Taxes, Depreciation and Amortizati Premium
Discover and utilize expert tips per method: Please log in... | Register
 

What are the Indicators of High Quality of Earnings?

Analyzing Reported Earnings
 
 

What is the Degree of Management Discretion or Manipulation?

Analyzing Reported Earnings
 
 

What is Debt to EBITDA? Definition

Credit Rating
 
 

Operating Income Before Depreciation And Amortization (OIBDA)

Profitability Measurements
 
 

EBITDA-To-Interest Coverage Ratio

Finance & Investing
 

Resources - Earnings Before Interest, Taxes, Depreciation and Amortizati Premium
Access presentations, news and videos on each method: Please log in... | Register

Financial Statement Analysis | Ratio Analysis

Ratio Analysis, Finanical Statement Analysis

3 Minute Introduction to Financial Ratio Analysis: Why do it and What are the Main Types?

Types of Financial Ratios, Financial Ratio Analysis, Financial Ratio Types

Introduction and Summary of EBITDA

Initial understanding of EBITDA
 

News

Ebitda Measuring
     
 

News

Ebitda Valuation
     
 

Videos

Ebitda Measuring
     
 

Videos

Ebitda Valuation
     
 

Presentations

Ebitda Measuring
     
 

Presentations

Ebitda Valuation
     
 

More

Ebitda Measuring
     
 

More

Ebitda Valuation
     

Compare with EBITDA:  EBIT  |  P/E Ratio  |  PEG Ratio  |  Relative Value of Growth  |  Economic Value Added  |  Economic Margin  |  Cash Ratio  |  Current Ratio  |  Earnings Per Share  |  Return on Equity  |  Return on Invested Capital  |  Market Value Added  |  CFROI  |  Fair Value  |  TSR  |  Seven Signs Of Ethical Collapse


Return to Management Hub: Decision-making & Valuation  |  Finance & Investing


More Management Methods, Models and Theory

Sponsor
Sponsor this knowledge center

Special Interest Group Leader
Expert? Become our EBITDA SIG Leader.

All you need to know about management

12manage for:



Management Smart Card

12manage in:


The perfect souvenir for your education program




Copyright 2015 12manage - The Executive Fast Track. V14.0 - Last updated: 28-8-2015. All names tm by their owners.