When looking for profit the EBITDA turns out to be an ally of the investor, professional analysts use this indicator and its correlation with other financial indicators to know the reality of the actions of any company.
Facilitating in this way the comparisons that allow investors to make decisions when buying or selling.
Advertisements
In this article you will find:
What is EBITDA?
(Earnings Before Interests, Taxes, Depreciations and Amortizations) EBITDA is an indicator used as a reference of the performance of a company, it constitutes an indicator of the approximate capacity of the company to conceive benefits. For which only its productive activity is considered.
Its translation into Spanish is earnings before interest, taxes, depreciation and amortization and in specific words it shows the approximate earnings or profit that a company, a business or project can generate, without taking into account debts, financial expenses, taxes, and other accounting expenses such as depreciation and Amortization.
Advertisements
What is EBITDA for?
It can inform the investor up to where it is a truly profitable project and from where its management makes it viable or not.
Advertisements
Its main utility lies in the generation of information, shows the results of a certain project. Leaving the financial and tax aspects to be analyzed later.
- It serves to assess the ability of the company to generate profits considering its productive activity. It is often criticized for being misleading, but it really is a matter of misinterpretation.
A project with Positive EBITDA, shows that the project will in principle be positive and its success will depend on the management of financial expenses, taxes and depreciation policies. For example, it is not an appropriate measure when dealing with projects heavily financed with external resources, which entail high financial costs. Well, despite a positive EBITDA, the high financing costs affect the final economic results of the project.
Advertisements
- It is used to quickly estimate the cash flow of a company, that is, it indicates the money that the company should have left, once the expenses are subtracted. In other words, it indicates the solvency of said company and its ability to pay its debts.
- It is useful for comparing various companies, as it displays financial information before financial expenses, taxes, and other expenses.
How is it calculated?
EBITDA It is calculated by means of the operating result of the company, without incorporating:
- Tax expenses
- Interest expenses
- Deprecations
- Amortization
In order to reveal as a result, the operational derivation of the company.
Advertisements
EBITDA = Revenues - costs of goods sold - general administration costs
Considerations
For this indicator to be used properly it is important to:
- It should not be confused or substituted for cash flow.
- Be clear that the earnings that this sample does not take into account certain expenses, so it usually gives the impression of greater benefits.
- At first glance, it makes it easy to compare the performance of several companies, but for a more in-depth analysis, you must keep in mind the quality of the earnings.
The importance of this indicator lies in the simplicity to calculate it. However, it is necessary to make certain clarifications in order to avoid a wrong interpretation of it, among these:
- The objective of EBITDA is not to measure the liquidity achieved by the company.
- By excluding depreciation, you no longer take into account past or current investments.
- By not taking into account the indebtedness contracted by the company, an EBITDA result is possible high, a consequence of increased leverage, thus reducing the actual ability to obtain benefit.
- It does not consider the true cash flow, as it considers all income without considering whether it has been collected or remains as an account receivable.
