It’s often said that the accounting term EBITDA shouldn’t be trusted as a gauge of the financial health of a company. When management emphasise EBITDA rather than net income, you have to ask the question – are they hiding something?
Last week we looked at EBIT, or earnings before interest and tax. This week we take depreciation and amortisation out of the equation as well, coming up with EBITDA – earnings before interest, taxes, depreciation, and amortisation.
Many criticise EBITDA because it doesn’t take into consideration important business costs and can therefore overstate a company’s profitability. EBITDA doesn’t include cash payments to cover interest on debt, taxes, depreciation on equipment and amortisation. Critics of EBITDA argue that it’s a prettied up earnings figure that makes a company look healthier than it really is.
It’s often said that the accounting term EBITDA shouldn’t be trusted as a gauge of the financial health of a company. When management emphasise EBITDA rather than net income, you have to ask the question – are they hiding something?
Last week we looked at EBIT, or earnings before interest and tax. This week we take depreciation and amortisation out of the equation as well, coming up with EBITDA – earnings before interest, taxes, depreciation, and amortisation.
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Many criticise EBITDA because it doesn’t take into consideration important business costs and can therefore overstate a company’s profitability. EBITDA doesn’t include cash payments to cover interest on debt, taxes, depreciation on equipment and amortisation. Critics of EBITDA argue that it’s a prettied up earnings figure that makes a company look healthier than it really is.
