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EBITDA Explained Simply EBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation & Amortization. EBITDA is a major financial indicator used to evaluate companies' profitability with different capital structures. EBITDA is a rough guide to show how much cash a business generates. Calculating EBITDA requires information from the company's Income Statement and Cash Flow Statement. Here's one way to do it: Net Income + Interest Expense (Income Statement) + Taxes (Income Statement) + Depreciation (Cash Flow Statement) + Amortization (Cash Flow Statement) Some investors love EBITDA. Others despise it. EBITDA does not take into account all business activities, so it might overstate cash flow. Charlie Munger calls EBITDA "Bullsh*t Earnings" Why? Because it ignores depreciation as an expense. Depreciation is when a tangible asset's value is gradually reduced over time to account for wear and tear. The equipment will eventually be replaced, so depreciation is an actual expense. This is why ignoring it when calculating profits can be a big mistake. Buffett & Munger prefer to look at EBT -- Earnings Before Taxes. This allows them to compare the earnings yield on a business to the earnings yield on bonds (which is also a pre-tax number). Do you use EBITDA? Let me know in the comments below! Follow me Brian Stoffel for more content like this *** P.S. Want to master the basics of accounting (for free)? 📕 Grab our FREE accounting infographic ebook: → https://lnkd.in/geciS9nM If you found this post useful, please repost ♻️ to share with your audience.
I mean I was taught in valuations what they are ultimately after is enterprise value which is the value of a business's operations. So it makes sense to use EBIT since the next line items come from capital structure and not operations. Depreciation and amortization while non-cash are integral to the operations of the business. I feel like if you are going to EBT you might as well go to Net Income at that point.
Considering depreciation or not is a debate, and is relative to industry or specific business which are asset driven or depend on huge physical assets (except humans) , Industry such as IT might not have substantial assets and with remote working it has further reduced depreciation in such cases might not have significant relevance however other aspect like human assets and thir cost does make.more relevance - My views
Free Cash Flow is king
Excellent, Mr Brian, 1. Matching principle as per accounting, Depreciation matches the use of fixed assets with the revenue they help to generate. 2. Depreciation reflects the consumption or usage of fixed asset over time, which is a legitimate business expenses 3. Depreciation is a tax-deductible expense, which reduces the company's taxable income, it is overall tax liability
Hi Brian you expressed the Profit concept till it's last stage. Alternatively this is similar to the Gross Value added statement where the contribution of each major stakeholder is depicted. Thanks for sharing 🙏
Do we consider EBITDA before buying a business. To buy a business on pennies to the dollar?
Very helpful!
If you remember one of our hot topics which is getting like global warming, my dearest friends & also best partners Alan Maris Ridho Akhita, Ihsan Hasan. And how lucky we are having joko setiyanto as our lovely master on it. Thanks Brian Stoffel for sharing. EBITDA indeed shows operational effectiveness & cost disciplined.
This topic has been one of my favorite topics and it will continue to be .. I like it and find myself gladly commenting on it .. It totally depends on the business you are analyzing.. For example, if you are analyzing a business whose revenue is mostly in cash or steadily operating cash flows (restaurants / hospitals etc.) where EBITDA could reasonably not be subject to estimates and judgments involved with accrual accounting , EBITDA is good to use .. But if you are analyzing a business whose revenue is mostly not cash (construction where percentage of completion) where EBITDA could be subject to estimates and judgments involved with accrual accounting , EBITDA is not good to use (may be very misleading) .. So understanding the business model itself in first place is very important to understand how it affects accounts and financial ratios etc .. Also, when I use EBITDA in analysis , I always remaind myself it is a proxy of operating cash flow / not the operating cash flow .. Also, I always remaind myself that EBITDA is easy to understand and use but it does not consider the changes in operating accounts on balance sheet .. So it really depends on the business model and the purpose of what the analysis is for ..