EBITDA explained

EBITDA is great for accountants, but it will confuse many others.

In business there are broadly two things to focus on - the front end (sales to create turnover) and the back end (controlling costs) to make / retain profit.

It depends what market you are working in, but all too often the sales price is dictated by external factors, so keeping a close eye and control on costs is key.

The best way to have money is to not spend it...

I came across this more detailed explanation of EBITDA written on LinkedIn by Brian Feroldi which is well worth a read.

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!

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