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”

# Time Value Mechanics

Some of my friends wanted to know more about the concepts and mechanics of time value, I have tried to put few examples along with it.

The process of discounting future cash flows converts them into cash flows in present value terms. Conversely, the process of compounding converts present cash flows into future cash flows.

Time Value Principle 1: Cash flows at different points in time cannot be compared and aggregated (i.e. added). All cash flows have to be brought to the same pointin time before comparisons and aggregations can be made. Continue reading “Time Value Mechanics”

# EBITDA: The Good, The Bad and The Ugly (Back to School)

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 Continue reading “EBITDA: The Good, The Bad and The Ugly (Back to School)”