What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
It is used to analyze and compare profitability between businesses and industries, as it eliminates the effects of financing and accounting decisions.
How to Calculate EBITDA?
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Importance of EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an important metric because it measures a company’s operating performance and gives a clearer picture of its overall financial health.
It also helps investors compare companies in the same industry.
Drawbacks of EBITDA
- EBITDA does not take into account financing costs, which can be a major expense for companies that are heavily financed.
- It does not consider the capital expenditure of a company, which can be a major cost for a business.
- EBITDA does not give a clear indication of the liquidity or overall financial health of a business.
- It does not factor in a company’s tax obligations and can create an exaggerated picture of a business’s profitability.
- EBITDA can be manipulated since it does not require companies to report certain costs, such as depreciation, amortization, and other non-cash expenses.
Example
Recently, Zomato turned EBITDA positive, which means that the company’s earnings are more than enough to cover for interest, taxes, depreciation and amortization – expenses that are unavoidable by the company.
This is an indication that the company is generating a profit from its ongoing operations.
The Bottom Line
Using EBITDA as a measure of your business’s success should be done with care – make sure you use other metrics and accounting ratios to supplement your analysis.
Another important factor that contributes to the overall financial health of your business is your financial management strategy.
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