EBITDA is calculated by taking operating income and adding depreciation and amortization expenses back to it. EBITDA is used to analyze a company's operating profitability before non-operating expenses (such as interest and "other" non-core expenses) and non-cash charges (depreciation and amortization).
Critics of EBITDA claim that it is misleading due to the fact that it is often confused with cash flow and factoring out interest, taxes, depreciation and amortization can make even completely unprofitable firms appear to be fiscally healthy. Looking back at the dotcom companies, there are countless examples of companies that had no hope, future or earnings and the use of EBITDA made them look attractive.
Also, EBITDA numbers are easy to manipulate. If fraudulent accounting techniques are used to inflate revenues and interest, and taxes, depreciation and amortization are factored out of the equation, almost any company will look great. Of course, when the truth comes out about the sales figures, the house of cards will tumble and investors will be in trouble. In the mid-nineties when Waste Management was struggling with earnings, they changed their depreciation schedule on their thousands of garbage trucks from 5 years to 8 years. This made profit jump in the current period because less depreciation was charged in the current period. Another example is the airline industry, where depreciation schedules were extended on the 737 to make profits appear better. When WorldCom started trending toward negative EBITDA, they began to change regular period expenses to assets so they could depreciate them. This removed the expense and increased depreciation, which inflated their EBITDA. This kept the bankers happy and protected WorldCom's stock.
Another concern is that EBITDA does not take into account working capital. It could be helpful to also point out that EBITDA is not a generally accepted accounting principal.
Because EBITDA can be manipulated like this, some analysts argue that a it doesn't truly reflect what is happening in companies. Most now realize that EBITDA must be compared to cash flow to ensure that EBITDA does actually convert to cash as expected.
To sum up the cons:
On the plus side, EBITDA makes it easier to calculate how much cash a company has to pay down debt on long term assets. This calculation is called a debt coverage ratio. It is calculated by taking EBITDA divided by the required debt payments. This makes EBITDA useful in determining how long a company can continue to pay its debt without additional financing.
One of the biggest mistakes that businesses make when it comes to their CRM software is the features they don’t use. This happens because they invest in CRM with a handful of problems in mind, so they’re content as long as it solves them. But if you want to maximize your ROI, you should be utilizing every feature available to you. more
VoIP makes a lot of sense for educational institutions—and it’s not just because of the substantial cost savings. Other benefits include increased efficiency and integration options. Emergency responsiveness can even be improved. more
The telemedicine revolution is finally happening. Experts have been discussing the potential for patients and healthcare providers to connect remotely for years, but the market is just now moving to adopt it—in a big way. Data suggests this market will grow over 14% annually through 2020! more