Learn about EBITDA with iMinds Money's insightful fast knowledge series.
Traditionally, those looking to investigate the financial health and value of a company have focused on things such as net income, cash flow and revenue. In recent times, another form of financial analysis has become increasingly used by investors, debt holder and others interested in the worth of businesses. It is known as EBITDA.
EBITDA is an acronym that refers to a company’s earnings before the deduction of interest, tax, depreciation and amortization expenses. It is a common and widely-used measure of the value of a business. The purpose of EBITDA analysis is to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects and canceling the effects of different capital structures.
EBITDA first came to prominence in the mid 1980’s when leveraged buyout investors examined distressed companies that would need financial restructuring. They used the EBITDA analysis as a quick calculation to determine whether these companies could pay back the interest on these financed deals. For example, a company with an EBITDA of $10 million and interest charges of $5 million has an interest coverage of 2. This is more than enough to sufficiently pay off the debt of this buyout. From this, EBITDA has grown today into a commonly used method of analysis for a wide range of businesses.
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