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EBITDA is the acronym of Earnings Before Interest, Taxes, Depreciation, and Amortization. Also known as Operational Cash Flow, this metric is the gross operating income of a firm plus depreciation and amortization. It indicates the free income of a company and strives to highlight the company's ability to create value, which the income statements do not explain satisfactorily. EBITDA is similar to the ordinary cash flow statements but excludes payments for taxes, interest, changes in working capital, and replacing capital assets. EBITDA, however, does not measure profitability or even cash earnings, for it does not include all cash outflows.
Rolling EBITDA definition: Rolling EBITDA is the EBITDA value for the previous accounting periods and the projected EBITDA for the subsequent accounting periods. It usually finds representation as a graph for easy comparison. For instance, a 12-month rolling EBITDA indicates the EBITDA for the preceding 6 months and the EBITDA projected for the next 12 months.
EBITDA Margin is EBITDA divided by total revenue and measures the extent to which operating expenses use up revenue.
Image Credit: Wikimedia Commons
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EBITDA is a non-GAAP standard but finds widespread use, especially in accrual accounting to find the actual performance of the firm in terms of operating cash flow generated. EBITDA becomes especially useful to determine performance when firms have large amounts of fixed assets subject to heavy depreciation charges or when firms have large amount of intangible assets subject to large amortization charges, both causing distortions. EBITDA also removes the distortions caused by different tax jurisdictions or different capital structures and thereby finds use to compare firms across industries.
Rolling EBITDA serves the additional purpose of making comparison of performance over multiple accounting periods. Analysis of rolling EBITDA indicates the extent of consistency in the firm’s performance and profitability and highlights improvements or weakness in performance over time, without depreciation, amortization, interest, or tax hiding or distorting such changes.
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Calculating EBITDA is a simple and straightforward calculation of total revenue minus epenses excluding tax, interest, and capital outgo. It involves reversing all interest, tax, depreciation, and amortization entries in the income statement.
- The income statement lists out all money resultant from company operations and subtract all expenses such as input costs, wages, rent, publicity charges, utilities, interest, tax payments, and also depreciation and amortization, to derive the net income.
- Tax is the total amount paid to federal, state, and local governments.
- Interest is the amount paid to companies or individuals for using credit or currency provided by them.
- Machines, buildings, and even intangibles such as copyright, trademark, or brand name recognition lose value over time and ultimately becoming obsolete. Depreciation is writing off a portion of the value of such assets to cater for such loss of asset through obsolescence.
- Amortization is the gradual elimination of a liability such as a mortgage through regular payments over a specified period
A point to note is that EBITA is not regulated by GAAP and has many limitations. EBITDA does not include many key expenditures such as capital financing, and it ignores the profit. While this allows for comparisons on a common platform, such factors also leave open good scope for manipulations in figures. As such, prudent investors never rely solely on rolling EBITDA values to make an analysis of the company.
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- Cardinal Money Management."EBITDA" http://www.stanford.edu/~mikefan/metrics/ebitda.html. Retrieved 13 December 2010.
- Shis, Bryan. "Deconstructing EBITDA." http://webuser.bus.umich.edu/rlehavy/cbsmktwatch20001226.pdf. Retrieved 13 DEcember 2010.