This is blog is a first in a series of wherein we explain “Accounting Terminology”. The most used term is EBITDA. What is EBITDA? And why is it important?
What is EBITDA?
EBITDA is an acronym that stands for “Earnings before Interest, Taxes, Depreciation and Amortization” and it’s used to measure the overall financial health of the business. Let’s understand more of these terms.
- Earnings=net profits
- Interest=expenses paid out for borrowings
- Taxes=income tax or local taxes paid
- Depreciation= decline in the value of tangible assets employed by the business
- Amortization=decline in the value of intangible assets employed by the business
How is EBITDA used as financial metric?
EBITDA is an indicator of the financial performance of a business. As a business you can use EBITDA number to get a clear idea of your company’s value. Also, it presents the worth of your business to outsiders.
How to calculate EBITDA?
EBITDA=Net Income+ Interest+ Taxes+Depreciation+Amortization
Why is EBITDA important?
A profit and loss statement contains both operating and non-operating expenses. EBITDA removes the impact of the non-operating expenses while measuring the performance of a business.Interest,taxes,depreciation and amortization are non operating expenses. Further, EBITDA provides a meaningful comparison between different companies in various sectors. This enables you map your performance with competitors. EBITDA as a unit of measurement is not accepted by all, the prominent one being Warren Buffet. That being said EBITDA will remain an important financial metric always.
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