Why Bother With EBITDA?
There are many reasons why using EBITDA to determine a company’s value is a good idea, especially when it comes to analyzing competition of like businesses or franchises in a certain area. For example, a person who asks what is EBITDA, understands the method, and uses it, will be able to see if one bookstore is outselling another in the same vicinity.
Surely a franchised fast-food restaurant that outsells its closest competitor 2:1 looks juicy to that investor who has cash to invest.
Often, although silly as it sounds, investors looking for tax breaks (losses) to avoid high tax payments to the IRS, will use EBITDA reports to find companies that have low revenues and high losses.
Banks and franchisors also use EBITDA to determine if funded or franchised companies are performing at set levels, or forecasted levels.
In the long run, however, unless you are an experienced investor, it’s best to skip the question what is EBITDA, and ask for reports such as a true cash flow pro forma or income statement to best determine how well a company is doing before taking the risk to invest.
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