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Explain about Earnings before interest taxes depreciation and amortization (EBITDA).
EBITDA means Earnings before interest taxes depreciation and amortizations. EBITDA focus on operating decisions of a business by excluding non-operating decisions.
Profitability between companies/industries can analysed by using EBITDA. A positive EBITDA means company is getting profits through its operations and a negative EBITDA means company is not getting profits through its operations and need to re adjust their operations to generate profits.
Advantages of EBITDA are as follows −
- Easy to calculate.
- Commonly used to compare business valuations.
- Represents company’s operating performances.
- Reduces risk.
- Business growth can be estimated.
Disadvantages of EBITDA are as follows −
- Capital expenditure is not considered.
- Not fall under GAAP.
- No particular procedure to calculate.
- By having higher numbers, companies can lose its trust.
- Change in working capital is not considered.
- Sometimes it can mislead investors.
Formulas
- EBITDA = Np+In+Ta+D+A
Here, Np=Net Profit, In=Interest, Ta=Taxes, D = Depreciation, A= Amortization
- EBITDA= OI+ D+ A
Here, OI = Operating Income, D = Depreciation, A= Amortization
- EBITDA Coverage Ratio = (EBITDA+LP)/ (IP+PP+LP)
Here, LP = Lease payments, IP= Interest payment, PP = Principal payments
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