IT Financials Glossary

EBITDA

Posted in Financial statements by mgentle on August 26, 2010

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. This represents the first part of the P&L (Profit & Loss) or Income Statement.

In plain English, EBITDA is operating profit, which is sales minus operating costs – ie, the day-to-day running costs like sales, marketing and administration. But plain English doesn’t help the non-specialist to understand what the remaining costs are, and that’s where EBITDA comes in:

Sales (top line)

– operating costs

EBITDA (operating profit)

Depreciation

Amortization

EBIT (operating income)

– Interest

EBT (earnings before taxes)

– Taxes

Net Income (bottom line)

So, you might ask, why bother with EBITDA? Why not just go straight to the net income at the bottom line? The main reason is to be able to compare the performance of companies in different sectors: because some industries are more capital-intensive than others, subtracting depreciation expenses would distort comparisons. EBITDA is therefore only useful for companies with large amounts of fixed assets, which generate large depreciation charges (like telcos or manufacturing companies).

Finally, because EBITDA was often misunderstood by investors before the dot-bomb crash in 2001 as representing cashflow – a misconception that companies didn’t exactly go out of their way to correct – EBITDA also became known as Earnings Before I Trick Dumb Auditors!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: