Everything you need to know about EBITDA
EBITDA just may be the 6 most notorious letters in Finance & Accounting
There is so much emphasis on this metric, yet it is so often misunderstood
Let's start with:
➡ What is EBITDA?
EBITDA's literal definition is
➡ How is EBITDA calculated?
Like the name implies..
Take your net income
[+] Interest Expenses
[-] Interest Income
[+] Depreciation & Amortization
➡ Why is EBITDA so important?
Well.. a number of reasons...the 4 biggest being:
1️⃣ EBITDA is commonly used to value businesses
2️⃣ EBITDA is commonly referenced on a number of ratios
3️⃣ EBITDA can be a good approximation for free cash flows (though it can also wildly differ)
4️⃣ EBITDA can be a good measure to compare companies across the same industry
➡ What are some common misconceptions with EBITDA?
1️⃣ EBITDA is not a GAAP metric
That’s right…for that reason, you won’t find it on a profit and loss
2️⃣ EBITDA does not equate to cash flows
Your cash flows can wildly differ from one period to another when compared to EBITDA, depending on how things like accounts receivable / payable, and fixed assets come into the mix (to name a few)
3️⃣ EBITDA is not the same as net operating income
While in many cases these 2 items may be the same, for some companies, it can differ
An example can be if a Fixed Asset is necessary in order to carry our revenue, in which case Depreciation would be included in cost of goods sold
➡ What’s my take on EBITDA?
It’s a powerful metric, and it’s popular for a reason
At the same time, it’s just one metric filled with hundreds that can be used to understand what’s happening with a business, and should not be the only one that you measure
Other metrics to consider are:
1️⃣ Gross Profit - what’s left over after you subtract out your COGS from your Revenue
2️⃣ Free Cash Flows - The cash flows available for distribution to investors or for future investments (operating cash flows - capital expenditures)
3️⃣ Annual Recurring Revenue - the amount of revenue that comes from customers committed to annual contracts that auto renew
And many more...
Those are just a few things to note about EBITDA - there is so much more to it
In the guide below, I've worked with the well-known EBITDA expert Chris Reilly to go into more details on EBITDA and share common misunderstandings, and other forms of EBITDA
If you aren't following Chris's LinkedIn, I highly suggest you do - his daily insights are gold, and he's been a huge inspiration in my journey as a LinkedIn content provider