EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. This kind of complex valuation strategy is often useful in assessing various aspects of the financial health of a business or for dealing with numbers at tax time.
Skilled accountants use EBITDA as part of a comprehensive financial analysis to find the best financial path forward for any business. Knowing about some basic terms related to EBITDA will help business leaders understand what's going on financially when discussing things with those who crunch the numbers.
Amortization
Amortization is basically the paying off of debt over a period of time. An amortization schedule makes this process into installments for the purpose of tax filing, etc.
Depreciation
Depreciation is a term for how aging equipment or assets lose value over time due to age. This can be a major piece of a company's accounting process, especially if the business has a lot of capital goods.
Cash flows
When companies calculate EBITDA and other numbers, they are including analysis of cash flows. Cash flows are revenue streams that managers can predict over a period of time. Some can be better predicted than others, but all can be estimated in some way.
Working capital
Working capital represents how much a company has in assets to plug into various new operations or investments. One criticism of EBITDA is that it fails to take working capital considerations into account.
GAAP
GAAP, or Generally Accepted Accounting Principles, are set up by the Financial Accounting Standards Board to help the financial community agree on how to crunch numbers. However, GAAP categorizes EBITDA in a less than straightforward way, leading some to question whether an EBITDA business estimate is accurate under GAAP standards.
U.S. Securities and Exchange Commission.
Operating cash flow
Operating cash flow is an alternative for measuring the health of a business. It uses cash flow principles (mentioned above) as part of a different financial metric for learning about the values on a company's books.
