- EBITDA

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By PATH by Simplex Support Team

updated 7 months ago

Create Data Mash Calculation with this Formula:


(Net Income + Interest Paid + Taxes Paid + Depreciation + Amortization)


Definition:


EBITDA, or earnings before interest, taxes, depreciation, and amortization, is used to evaluate the performance of a business before the impact of financing decisions. It approximates the operational results of a business on a cash flow basis. For both reasons, it is one of the most popular ways to examine the results of an entity.


In essence, the EBITDA calculation adds back all non-cash and non-operational expenses to the net income figure. The interest and tax line items that are excluded from the measure are not directly related to company operations, while the depreciation and amortization line items are non-cash items.


Of the four items that are excluded from the EBITDA measure, the two most critical are depreciation and amortization, since these can be extremely large numbers in capital-intensive industries, or in cases where a company has acquired a large amount of intangible assets and must amortize them. The interest line item is usually a considerably smaller figure, except in debt-heavy situations.

All of the preceding information is derived from the income statement of the business under review.


How to Use EBITDA


EBITDA is a subset of the net income information presented in a company's income statement, and is designed for three purposes:


  • To yield a rough estimate of a company's cash flow from operations
  • To provide a basis for comparison between different companies that strip away financing and non-cash items
  • To provide an estimate of the funds available to pay for debt


Unfortunately, it has also been used by companies experiencing net losses, so that they can point toward a different performance figure that shows a positive gain, which can mislead investors.


TIP: Why is EBITDA so important?

When you're comparing the profitability of one business to another, EBITDA can help you calculate a business's cash flow. 


When a company's EBITDA is negative, it has poor cash flow. However, a positive EBITDA doesn't automatically mean a business has high profitability either.

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