EBITDA For Dummies

This is a topic that comes up quite often when I’m mentoring people who are just starting out their businesses. EBITDA can be a very tough thing to learn. Especially if you are new to running a business. However, it doesn’t have to be that way. I’m going to try to break this down Barney style for you. EBITDA for Dummies if you will. After you read this article you should have an understanding of 3 things. What EBITDA is, what it is used for, and if you need to account for it in your business. So, let’s get started!

What is EBITDA?

You may be asking yourself what is EBITDA and what does it stand for. Well EBITDA stands for Earnings Before Interests, Taxes, Depreciation, and Amortization. That is just a fancy way of a company saying how profitable they are. In other words, a measure of profitability. You can figure out your EBITDA and work out the voodoo math by looking at your financial statements. Revealing EBITDA is not necessary or legally required. So, don’t worry if you are afraid of doing something illegal if you don’t reveal it. You’ll be fine if you don’t reveal it.

What is EBITDA used for?

Individuals are able to compare and analyze profitability among companies and industries. It eliminates the effects of financing decisions and non-cash depreciation and amortization activity. That is why institutional investors are in love with EBITDA. They use it to compare companies and industries and make a more calculated decision when investing. The argument for EBITDA, by institutional investors, is that it provides you a better picture of growth trends when expenses are excluded. Which, isn’t wrong, so take that for what you will.

How do I do it? Do I need to do it for my company?

Now to the important part of this article. Does this apply to you? Well, that really depends on your situation. Not every company relies on EBITDA. Generally Accepted Accounting Principles (GAAP) do not count EBITDA. GAAP rules apply when companies release a financial statement to shareholders or other external sources. When you should and should not apply EBITDA all depend on your current situation. The bigger and faster you grow, often requires more information for potential investors who want to use EBITDA to measure current cash profit your business is generating. EBITDA is an easy way to provide operating cash flow generated by your business without creating full blown Statement of Cash Flows.

Takeaway

There you have it! That’s EBITDA for Dummies! Hopefully, that was helpful and you left with a better understanding of EBITDA than before reading this article. As always, this is just an introduction to this topic be sure to continue to learn and find more resources to further your knowledge.

If you are looking for a great resource for learning more about EBITDA check out this book by Warren Buffet.

If you like this article check out our other investing articles!