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EBITDA

Use EBITDA to measure your company's finances and calculate potential investments

By Kelley Keith
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. EBITDA can be a useful tool to determine how much a company earned prior to any variable expenses. However, this figure is unregulated under generally accepted accounting principles and can be misleading because companies can alter the included items to calculate EBITDA. Therefore, if you are using this figure as a comparison figure, be sure to use other accounting measures to verify this amount.

The predecessor to EBITDA was EBIT, or Earnings Before Interest and Taxes. EBITDA is now the more accepted profitability measure as it removes depreciation and amortization from the calculation. One of the useful aspects of EBITDA is that it can measure a company's ability to add debt to their balance sheet. The EBITDA formula rose to popularity in the 1980s as the aforementioned gauge of debt. One misconception is that EBITDA is a true representative figure for cash flows but that is not true. It is more useful as a profitability measurement. Before using EBITDA in your business, there are few items to consider:

1. Understand the EBITDA formula.

2. Contact an accountant for EBITDA help.

3. Use the EBITDA calculation for company comparison.

 

Examine the method to calculate EBITDA

Before you can use a financial calculation, it is important to determine how the formula works and how to use it.
Try: Use this tutorial from Value Management on EBITDA to understand the implications of the calculation. Obtain your tax return to calculate your company's EBITDA using the Biz2credit calculator.

Employ the services of an accountant for EBITDA advice

If you are a small business or want to get a second opinion on the EBITDA calculation, the best option is to hire a certified public accountant. Secondly, since there are ways to distort EBITDA, it is even more necessary to hire an accountant to help with the process.
Try: Contact the accounting consultants at Feeley & Driscoll for EBITDA help. Use the accounting services at Deloitte Development for EBITDA advice.

Utilize EBITDA for company comparison

To discern where your company stands relative to industry competitors, EBITDA can be a useful financial metric. However, do not solely use this figure. EBITDA should be just one factor in the comparative analysis.
Try: Compute the EBITDA figure from the financial information available at CNN Money or Edgar Online for your company or other companies of interest.

 

  • When using accounting figures such as the EBITDA information, it is important to know the numbers are only good as the person entering the figures. As many of the recent business accounting investigations demonstrate, numbers can be deceiving. Therefore, examine the business itself and its operations if you thinking of purchasing the business or becoming a trading partner.

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