EBITDA

EBITDA refers to earnings before interest, taxes, depreciation and amortization. It is also referred to as operational or regular earnings from operations. It is used in many business ratios and analyzes.

Leverage Ratios

Financial Leverage

Leverage refers to the ability to lift a heavier load using a fulcrum and a lever.  The common image is a board on a triangular pivot point with a heavy weight (M1) on one end and a lighter weight (M2) on the other.   As the lever shifts towards the lighter load it starts to lift the heavier weight. In effect, as the distance ‘b’ gets longer, it becomes easier to lift M1. This principle works with finances too.  How so?

EBITDA – Drawbacks

EBITDA

There are several business financial attributes required for EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to work well as a basis for the multiple of earnings method (the method used with the Market Comparable Valuation Approach); see Fair Market Value  for a better understanding of the three primary business valuation approaches.

EBITDA – Buyer Beware (Case Study)

EBITDA

This article will illustrate the opposite effect using the same business information.   A buyer of a business should be leery of financial information and look for improper accounting processes.   The goal is to reduce the operational income and ultimately the value of the business.   The goal is to get the business valuation to a realistic number.

EBITDA

EBITDA

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.   The value is generally known as operational profit before capital expenditures and tax obligations.

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