What is EBITDA?
To measure the
earnings of a company, EBITDA is one of the key metrics. It stands for earnings
before interest, taxes, depreciation, and amortization. Using EBITDA as an
indicator you can find out the real value of a business. EBITDA is significant
for the company to evaluate its performance with previous years and
competitors. Whereas, investors use EBITDA to determine the safety of their
investments along with the dividend they may expect. The meaning of EBITDA is
very important as investors make predictions about a company based on it.
What does EBITDA mean?
EBITDA or earnings
before interest, taxes, depreciation and amortization is useful for computing
the performance of the business by knowing the profits or losses a business is
making. It provides lenders and investors with data about business performance
in terms of its finances. It also provides an estimation of the operational
viability of the business. Since EBITDA measures the financial performance of a
company before external factors like taxes and interest, it is often used as an
alternative to net income.
How to calculate EBITDA
There are two
ways to calculate the EBITDA. They are;
EBITDA = Net Profit + Taxes + Interest +
Amortization + Deprecation
EBITDA = Operating Income + Amortization +
Significance of EBITDA
significant not only for the company but also for its stakeholders. Investors
invest in a company or buy its shares only after considering the genuine
performance of the company i.e. EBITDA. Through EBITDA the investors come to
know about the operational performance and profitability of the company. When
investors purchase shares after considering a rise in the EBITDA of a company,
the prices of the shares move up. And when the performance or EBITDA falls the
supply of shares increases in the stock market and its price falls. Similarly, EBITDA
is important for lenders to understand whether they will be able to recover the
amount lent or to know whether the money can be given as a loan to a company. EBITDA
is used by a company to monitor its performance and compare it with its peers.
Advantages of EBITDA
are the advantages of EBITDA;
· Gives a reliable overview of the future growth
of the business by giving a clear picture of the operating profitability.
· It gives an actual account of the expenses that
a business requires for its regular functioning.
· It helps in comparison of a company with its
· EBITDA gives a clear view of the company’s cash
flow generation during the ongoing business.
· The formula for EBITDA calculation is simple and
can be easily derived.
mentioned are some of the benefits of EBITDA. The start-ups that require funds
have many reasons to use EBITDA as their top indicator. It is a critical
indicator for a company when it is used in good faith. It helps the company and
its stakeholders to take wise decisions regarding the future direction. With EBITDA
all parties are clear about the future performance of a company and comparison
with the competitors can also be done easily. EBITDA is also useful for
investing in stocks. If you want to learn about using EBITDA as an indicator
for long-term investing you may get in touch with Indira Securities.