EBITDA, or Earnings Before Interest, Taxation, Depreciation and Amortization, is a frequently-used term that refers to a simple but invaluable accounting tool. Though EBITDA is not a formula that is accepted under GAAP, or Generally Accepted Accounting Principles, that omission belies its usefulness to those who are trying to provide an easy to understand, at-a-glance assessment of their business’ health and value, as well as to those who are trying to get a good idea of how a business measures up to others.
Because EBITDA does not adhere to GAAP, it is not a calculation that is routinely included on a business’ official financial statement. However, business owners who have put their company up for sale or who are seeking outside investments have found that it provides outsiders with a number that allows a quick and fair comparison of the business’ health and earnings potential, especially as compared to others.
EBITDA’s value lies in the fact that once calculated it provides a snapshot of a business’ financial health and its potential for growth, without the complicating elements that can muddy the waters. The formula takes the business’ revenue figures and subtracts its expenses with the exception of those for depreciation, amortization, taxes, and interest – in other words, it is net income with the addition of those factors. To calculate a business’ EBITDA number, the business owner needs to begin with the following six figures:
A person or company considering investing in the business is able to use this information from multiple businesses in the same industry or business and compare them against one another. Though the information that is available on official financial statements may be more complete, different accounting techniques can make it hard to be sure that the comparisons are being made on a level playing field. EBIDTA has its drawbacks and is one of many methods that should be used for making important financial decisions, but for those looking for a quick and accurate way to get a solid feel for whether to consider a deeper dive, it eliminates uncertainty and provides solid information.
If you are an investor or buyer looking for professional guidance or assistance in interpreting financial information about a small business, contact a professional CPA for guidance.Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
