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EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

Definition

A company's earnings before interest, taxes, depreciation, and amortization is computed by considering a company's earnings before interest payments, tax, depreciation, and amortization are subtracted for any final accounting of its income and expenses. The EBITDA of a business gives an indication of its current operational profitability, i.e., how much profit it makes with its present assets and its operations on the products it produces and sells.

EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

In the increasingly complex economy of the modern day, a measure of growth and production has become necessary for all aspects of market activities. This most famously comes in the form of a "Gross Domestic Product" measurement on the national level, as a yearly evaluation of a country's performance. But this evaluation is also important in the world of business and international trading.

For businesses and companies alike, this measurement is in the form of EBITDA. EBITDA, standing for "Earnings Before Interest, Taxes, Depreciation and Amortization", is a common means of indicating a company or businesses' financial performance during a given period of time.

This can be easily determined using the formula of; EBITDA = Revenue - Expenses (excluding tax, interest, amortization, and depreciation).

In a manner, EBITDA is a measure of net income during a quarterly or annual basis. Just like with GDP, this evaluation can be used to compare a company's performance with its peers and competitors by eliminating the effects of financing and/or accounting decisions.

Perhaps the most well known aspect of a EBITDA measurement is the increased flexibility it brings. Companies are able to determine what they want to be included in their EBITDA calculations, which allow for very finite or specific measurement to be made, or even broad generalizations.

First coming into widespread use in the complex financial era of the 1980s, EBITDA has become one of the most popular forms of measuring expensive assets for industries over a long period of time. Today this is especially true, as companies often times include EBITDA evaluations in their reports of progress even when it is not necessarily needed.

Specifically, this EBITDA evaluation is a measurement of profitability during a period of time, but does not necessarily mean the cash flow received by a business or company. Similarly, the monetary means required to fund and maintain working capital is not measured by EBITDA evaluations, and neither is the financial costs of replacing old pieces of equipment.

One of the disadvantages of this aspect is that EBITDA is often times used to mask a company's true earnings. This makes evaluating a business' true profits a tricky base for government officials and potential investors alike. It is important for such people to remember that the use of a EBITDA measurement by a business or company often times increases its actual earnings, and can be used as a gimmick to fool others.

Knowing how to properly evaluate a EBITDA is important for any investor and it is wise for such people to always do their research thoroughly before making any investment decisions - especially major ones.

Even so, EBITDA's are one of the most popular forms of measuring a company or business' quarter or annually performance. Ever since its conception, it has only increased its widespread use on the market and practically every business today uses its system of measurements to show the world their performance levels and to compare themselves with their peers and competitors.


Additional Resources

  1. Earnings Before Interest, Taxes, Depreciation, And Amortization ... [euler.math.uga.edu]
  2. Earnings Before Interest, Taxes, And Amortization (ebita) – Miis Impact [sites.miis.edu]
  3. Ebitda [pages.stern.nyu.edu]
  4. Ebitda, Earnings Before Interest Taxes Depreciation And Amortization [wordnet-rdf.princeton.edu]
  5. What Is Free Cash Flow And How Do I Calculate It? [educ.jmu.edu]
  6. Ebitda.ppt [collab.itc.virginia.edu]