EBITDA is the acronym for earnings before interest, tax, depreciation and amortization.
It is a factor used to calculate the value of a business.
However, to properly measure a company’s profitability, many academics argue that non-operating expenses should not be taken into account when analysing a company’s financial strength.
If expenses like interest, tax, depreciation and amortization is included to earnings, it looks too much like a formula to calculate cash flow. And there are already various methods to work out cash flow.
The problem with EBITDA is that when it is used to measure a company’s financial strength, the focal point is no longer high revenue, low expenses, or market share.
How valuable a business is will be more heavily impacted by accountants. And creative accountants can do whatever they want to value a business much higher than it’s actual sales number suggest… as long as they stay within the confines of what is legal in accounting standards.
In fact, any company that is bleeding money and basically dying can be painted over to look great with EBITDA.
On the contrary, EBITDA is a key indicator for investment researchers.
While it does not accurately measure cash flow, it is still a dependable estimation of cash flow and easy to calculate.
Using it as a statistics to generate an overview of comparing various different companies will be more efficient for an analyst. And if a company stands out, it might be worth a deeper look into.
When comparing the performance of two different companies, solely depending on EBITDA data would be an inefficient way to do it.
Other variations of EBITDA include EBITDAR and EBITDARM. These factor in other variables for for specificity.
