EBITDA

EBITDA or Earnings Before Interest, Taxes, Depreciation, and Amortisation is a metric used for assessing a company’s operating performance. It also shows the cash flow generated by the company’s business. While calculating EBITDA, the non-operating and non-cash expenses are removed to arrive at the income from operations.
EBITDA can be easily calculated from a company’s financial statements. It is not a recognised metric by the International Financial Reporting Standards (IFRS) or US GAAP.

Calculation of EBITDA

Calculation of EBITDA
EBITDA = Net Income + Interest Expenses + Taxes + Depreciation and Amortization
or
EBITDA = Operating Profit + Depreciation and Amortization

Advantages of EBITDA

Advantages of EBITDA are:
1. EBITDA gives an overview of the growth and effectiveness of a businesses’ operational efficiency.
2. EBITDA helps in assessing the cash flow generated by a company.
3. It takes into account only those expenses which are necessary for running daily company operations.
4. It helps to compare a company’s financial strength & efficiency against the competition.

Limitations of EBITDA

Limitations of EBITDA are:
1. It is not recognised as a standard reporting metric.
2. Earnings are reported differently by companies across the spectrum and thus EBITDA can be manipulated by promoters to inflate their profits/income.