EBITDA – A Very Useful Measure

Scan the business press and you’ll see a company’s EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) mentioned a lot. Why?

Sometimes called the cash profit, EBITDA shows the cash the operating business has generated, obviously important. This isn’t the same as the cash flow but can be more useful, depending on the question you’re trying to answer.

Sales and costs are shown in Income Statements when products/services are delivered to customers (even if not all the cash has been received yet) and when purchases are received from suppliers (even if not all have been paid for yet).

However, depreciation and amortisation are ‘non-cash’ expenses. The cash is spent when the assets are purchased. When, subsequently, they are depreciated or amortised that’s just book entries. No further cash is spent.

So, EBITDA, the profit of the operating business before those non-cash expenses, shows the cash the business has generated even if not all of it has been received or paid yet.

And that’s why EBITDA gets mentioned a lot. Rightly so.

#financialstatements #EBITDA

Leave a Reply

Your email address will not be published.