Explain about Earnings before interest taxes depreciation and amortization (EBITDA).

Banking & FinanceFinance ManagementGrowth & Empowerment

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

raja
Published on 25-Sep-2020 17:49:47
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