Financial term of the Week

EEBITDA

ARNINGS before interest, taxes, depreciation and amortisation (EBITDA) is a financial metric that measures a company’s profitability before certain non-cash expenses are deducted.

These expenses include the cost of borrowing money to finance the company’s operations (interest expense), the income taxes the company pays to the government (tax expense), the cost of spreading out the expense of tangible assets over their useful life (depreciation expense), the cost of spreading out the expense of intangible assets over their useful life (amortisation expense).

EBITDA can be used to compare the profitability of companies in different industries, as it strips out the impact of different financing and tax structures. It can also be used to assess a company’s ability to generate cash flow, as it excludes noncash expenses.

However, it is important to note that EBITDA is not a perfect measure of profitability. It excludes some important expenses such as capital expenditures on new assets and working capital requirements.

Additionally, EBITDA can be manipulated by companies to make their financial performance appear better than they really are.

Overall, EBITDA is a useful financial metric, but it should be used in conjunction with other metrics to get a complete picture of a company’s financial performance.

It is important to note that EBITDA is a non-GAAP (generally accepted accounting principles) measure, meaning that it is not calculated in accordance with GAAP.

This is because EBITDA excludes certain expenses that are required to be included in net income under GAAP. However, EBITDA is widely used by investors and analysts to assess a company’s financial performance.