EBITDA is one of those terms that has received increased usage but usually for the wrong reason. This article will define it and discuss how it can be useful but also misleading. EBITDA is fancy tax lingo for earnings before interest, taxes, depreciation, and amortization. It is calculated by taking operating income and adding back to it interest, depreciation and amortization expenses. EBITDA is used to analyze a company’s operating profitability before non-operating expenses (such as interest and “other” non-core expenses) and non-cash charges (depreciation and amortization).
The Good EBITDA can be used to analyze the profitability between companies and industries.Because it eliminates the effects of financing and accounting decisions, EBITDA can provide a relatively good “apples-to-apples” comparison. For example, EBITDA as a percent of sales (the higher the ratio, the higher the profitability) can be used to find companies that are the most efficient operators in an industry. The ratio can also be used to evaluate different industry trends over time. Because it removes the impact of financing large capital investments and depreciation from the analysis, Continue reading “Good Bad & Ugly about EBITDA”