EBITDA, or otherwise known as earnings before interest, taxes, depreciation, and amortization, is a method for companies to measure their financial performance and can help them understand more about their net income. However, some companies don’t like to heavily rely on EDITDA because it may not account for the costs of capital investments like property, plants, and equipment’s.
In addition, EBITDA does not include expenses that are associated with debt by adding back interest expense and taxes to earnings. EBITDA is a precise measure of corporate performance because it is able to portray companies’ earnings before accounting and financial deductions are taken out. With that being said, EBITDA is a measurement of a company’s profitability. There are no requirements from a legal standpoint for companies to disclose their EBITDA. According to the U.S. generally accounting principles, reporting of this information can be found most of the time in a company’s financial statements.
Earnings, tax, and interest figures are found on the income statement, whereas depreciation and amortization figures are normally found in the notes to operating profit or on the cash flow statement. In order to properly calculate EBITDA is to start with operating profit, then to add back depreciation and amortization.
Management teams argue that using EBITDA gives a better picture of profit growth trends when the expense accounts associated with capital are excluded. Although there is nothing misleading about EBITDA as a growth metric, it can sometimes overshadow a company’s actual financial performance and the risks associated with it.