EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA is a very pure measure of profitability. Since companies have different amounts of debt, interest rates, taxes, depreciation, and amortization, when you factor those out you get a clearer picture of whether you can sell the product at a profit. For instance, if you were looking at four different companies that sold shoes, comparing their EBITDAs would show who was selling their product at the highest profit. However, EBITDA is only one factor in financial analysis. It should not be used as your only method of comparing companies. For instance, let’s say company A had a EBITDA of $20,000. They also paid $30,000 in interest. The $30,000 of interest would not show up on their EBITDA. $20,000 in profits minus $30,000 interest means they are losing $10,000 a year. The interest they pay doesn’t decrease their EBITDA, but unless something is done they will soon go out of business. Not all companies that sell their product at a profit before interest, taxes, depreciation and amortization are financially sound.
Company B has a EBITDA of $13,000. They own all their assets and have no interest expense. They have profits of $13,000. A $13,000 profit is better than a loss any day. If you compared only EBITDAs, you could be mislead into making a poor investment.
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