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Last Updated on: July 25, 2020 by Joseph Muriithi
You probably have come across the term EBITDA and did not fully understand what it implies and also what it stands for, so…What is EBITDA?. If this is the case, give yourself a minute, probably five minutes and take a closer look because it can be used to describe the value of your business. Here is what it means and how best to proceed in using it as a calculation, yes, it’s a calculation.
EBITDA is an acronym for Earnings before Interests, Taxes, Depreciation, and Amortization. It is commonly used to compare and contrast the financial ability of two or more entities. However, although a good way to describe the value of a business, it does not always receive recognition and consideration of importance that is attributed to it.
Varying Opinions about EBITDA
Although it does not receive the recognition that it deserves, EBITDA is used often and one would wonder why? The calculation to go about EBITDA is rather ubiquitous due to the fact that EBITDA takes a very complicated subjected that will on most occasions be confused for another value. EBITDA will determine the value of a business, and bring it down to a level of simple understanding. The calculation is supposed to generate a single number.
EBITDA, Case of Mistaken Identity
One of the main reasons that it seems to be undervalued and yet it has a very important role is the fact that it often gets mistaken for other parameters. Cases of EBITDA being used as a value to substitute cash flow are common and yet very misleading and dangerous. It is vital that you understand there is a difference between earnings and cash earnings and they can never be one and the same thing. Adding to the case of mistaken identity, its calculation ignores a lot of key factors such as interest, depreciation, taxes, and amortization making its understanding a little bit vague.
What is EBITDA Really?
Earnings before interests, tax, depreciation, and amortization (EBITDA) is basically a measure of a business or company performance in its operations. In simplified terms, it is a raw evaluation of performance that does not factor in financial decisions, accounting decisions or tax environment; more clearly, it’s a representation of how the company would fair if it were not to perform any requirements.
Achieving Optimal Results
Considering all these factors, no matter how important EBITDA is, you clearly don’t want it ruining your day. Do not place too much emphasis of it when determining the strength and position of your business. Its calculation and application overlook so many factors that could influence the future of your business. However, if you are going to use it, seek professional advice and help from business brokers and business intermediaries.
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