Have you been wondering what annual EBITDA entails due to hearing discussions about it recently? When you hear reference being made to the term EBITDA, this refers to earnings before interest, taxes, depreciation as well as amortization. This is defined as a metric that is applied for the sake of being able to conduct an evaluation of the operational performance for a business. It also has the potential to be viewed as a proxy in relation to a cash flow concerning the whole process of the operations of a business.
Annual EBITDA for any measurement year means consolidated net income before interest, taxes, depreciation, amortization, extraordinary items, LIFO Income and Expense items, the management fees. Usually, annual EBITDA means the consolidated adjusted EBITDA for the applicable fiscal year ending December 31. Annual EBITDA means EBITDA for the most recent financial year, as identified in the consolidated financial statements.
Annual EBITDA simple explanation video:
The metric of the EBITDA poses as a varied operating income, which is regarded as EBIT, which is noted to provide the exclusion of expenses that are non-operational as well as some types of expenses that are categorized as being non-cash. The reason for the usage of such deductions is to engage in the removal of the elements that business owners tend to hold discretion over. Such elements are noted as being the structure of capital, financing of debt as well as methods of depreciation. It is further noted that this does relate to taxes to some degree. This can be applied for the sake of demonstrating the financial performance of a business with no need to take into consideration the capital structure of the business.
Annual EBITDA detailed explanation video:
When there is the usage of EBITDA in terms of business, it is realized that the approach is to place a concentration on the decisions pertaining to the operation of a business prior to giving consideration to the impact that is made by leverage, capital structure as well as items that are considered to be categorized as non-cash. Such items take into account depreciation.
It is worthwhile to note that this is not a metric that is recognized as being in usage according to the perception of the IFRS as well as US GAAP. The reality is that there are some who are investors, such as Warren Buffet, who holds a rather strong dislike in relation to the usage of this type of metric. This is due to the fact that the metric does not take into consideration the issue of the depreciation for the assets of a business. Take into consideration, for example, the fact that in such cases that a business possesses a vast quantity of equipment that is depreciable, which naturally is regarded as also holding an enormous level of expense in terms of depreciation, then the reality is that there is no recording of the expenses that are associated with the sustenance and maintenance of particular capital assets.
In terms of reference being made to interest as it applies in the scenario of the usage of EBITDA, it is not included in the placement of EBITDA. This is due to the fact there is a reliance on the structure of the funding pertaining to a business. This is retrieved from the funds that are borrowed by the business in order to provide finances to allow the operation of the company. It is understandable that various companies tend to possess capital structures that are noted as being diversified, which thus causes the emergence of different expenses related to levels of interest. That is why it is considered to be more straightforward to engage in the conducting of a comparison of the respective performance of businesses when there is the addition of back interest while not giving consideration to the contribution of the capital structure in relation to the business. Do give consideration to the fact that payments for interest are regarded as being tax-deductible. This provides the indication that corporations can benefit from this scenario when there is the application of what is referred to as a tax shield at the corporate level.
Then when there is the reference to taxes as applied to the usage of EBITDA, there is the truth that there can be variations in regard to taxes. Thus, it is acknowledged that the rate of taxes is based on the location concerning the operation of the business. Taxes are regarded as being functionality in relation to tax rules. Taxes, however, are noted as not being truly a component that is utilized for the purpose of conducting an assessment of the performance of the management team. With this perspective in mind, it is realized that the majority of analysts in the financial sector tend to hold the preference to engage in the addition of them again in such cases that there is the conducting of comparisons of various companies.
For the issues of depreciation along with amortization, there is a reliance on the historical investments which have been conducted by the business. Therefore, there is the comprehension that there is no reliance on the operation performed at the present time. Businesses are recognized as placing investments into assets that are fixed and long term, which are known to emerge in a loss of value as a result of much usage for an extended period of time. Such assets tend to include vehicles as well as buildings. It is noted that the expenses that are associated with depreciation are founded on part of the deterioration of the assets that are tangible and fixed. On the other hand, expenses that are regarded as being associated with amortization are incurred in such cases that the asset is regarded as being an intangible item. A patent is an example of an item that undergoes amortization due to the fact that it possesses a life cycle of usefulness that is recognized as holding a time limitation prior to a date of expiration.
Depreciation as well as amortization are deeply impacted by the perceptions concerning the usefulness of the economic life of assets, the value concerning salvaging, along with the method of depreciation that is applied. Due to this principle, analysts may discover that the income for operating the business is actually not the same as what they perceive the number should indicate. That is why depreciation along with amortization is not part of the calculation process when EBITDA is applied.