EBITDA-Earnings before Interest, Tax, Depreciation and Amortization

by Imarticus Learning Professional Education Institute

This is one of the most sort out data point for all the traders or investors to take a plunge into stocks of any company.

EBITDA is self explanatory; it means that the Earnings that are taken into consideration well before paying out any expenses. General understanding is that companies only have rents and salaries as expenses but that’s actually a myth. Interests on Loans for business, Taxes on earnings etc are also one of the biggest expenses that a company needs to pay.

EBITDA does not include these expenses into its calculations and hence not accounting for the costs which do not impact its core operations .The traders use this as a tool to compare two business models. Reason being a retail business or a corporate business might have different expenses and hence it will be difficult to analyze if investing in the retail or manufacturing business would be easy. But if the expenses are not considered then it makes the data so simple that taking investment decisions becomes very simple.

Let’s look at the example below;

Business Type: Retail	Cash Flow	Business Type: Manufacturing	Cash Flow
Total Earnings	10,000,000	Total Earnings	20,000,000
Total Expenses(includes salaries, etc)	3,500,000	Total Expenses(includes salaries, interests etc)	6,000,000
Total Depreciation, Interest	500,000	Total Depreciation, Interest	800,000
Total Taxes	1,000,000	Total Taxes	2,000,000
Total Cash Earning	5,000,000	Total Cash Earning	11,200,000

The above figure shows the EBITDA of the companies are 6,500,000 and 14,000,000 but actual cash earnings differs by half.

Another problem with EBITDA as it does not include the details of when the cash has been exchanged but only what the company decided on papers as this is not really showing the cash earnings.

Hence, if someone looks at the EBITDA they will think Manufacturing business is good investment whereas Retail is a better option considering they have less debt to pay.

We would be talking about this in our Investment Banking course in detail.

Source: https://imarticuslearning.blogspot.in/2016/07/ebitda-earnings-before-interest-tax.html