EBITDA is a term used in the business community to evaluate a company’s performance.
A friend once told me it sounded like an ice cream flavor. Well, some may think EBITDA is as valuable in analysis as ice cream is to your diet.
What does it mean? EBITDA is an acronym for ‘earnings, before, interest, taxes, deprecation, and amortization’. It is an indicator of a company’s operations.
The formula is: EBITDA = Net income (earnings) – interest (cost of borrowing) – taxes (amount paid to the government) – depreciation (expensing of fixed assets over time) – amortization (expensing of an intangible asset over time).
The principle behind EBITDA is it measures the cash generated by the operations of a company; it also allows analyst to compare the profitability of different companies in the same industry; and is used to determine the value of a company.
A word of caution is the fact that EBITDA does not show the total cash flow of a business. It excludes capital expenditures, and the cash required to fund working capital, which can be significant.
Like all financial ratios or calculations EBITDA should be considered as one of the measurements of a business; however, it should be used in conjunction with other financial ratios.
Do you understand your company’s ratios? Are you operating as effectively as you can? Do you wish you had someone to analyze and explain what’s happening in your business? Would you like someone to assist you moving your company from good to great?
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