Syntax error Explain about Earnings before interest taxes depreciation and amortization (EBITDA).

Explain about Earnings before interest taxes depreciation and amortization (EBITDA).

EBITDA means Earnings before interest taxes depreciation and amortizations. EBITDA focus on operating decisions of a business by excluding non-operating decisions.

Profitability between companies/industries can analysed by using EBITDA. A positive EBITDA means company is getting profits through its operations and a negative EBITDA means company is not getting profits through its operations and need to re adjust their operations to generate profits.

Advantages of EBITDA are as follows −

  • Easy to calculate.
  • Commonly used to compare business valuations.
  • Represents company’s operating performances.
  • Reduces risk.
  • Business growth can be estimated.

Disadvantages of EBITDA are as follows −

  • Capital expenditure is not considered.
  • Not fall under GAAP.
  • No particular procedure to calculate.
  • By having higher numbers, companies can lose its trust.
  • Change in working capital is not considered.
  • Sometimes it can mislead investors.

Formulas

  • EBITDA = Np+In+Ta+D+A

Here, Np=Net Profit, In=Interest, Ta=Taxes, D = Depreciation, A= Amortization

  • EBITDA= OI+ D+ A

Here, OI = Operating Income, D = Depreciation, A= Amortization

  • EBITDA Coverage Ratio = (EBITDA+LP)/ (IP+PP+LP)

Here, LP = Lease payments, IP= Interest payment, PP = Principal payments

Updated on: 2020-09-25T14:20:17+05:30

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