By Brad MacLiver
Authorship and profile at Google
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.
The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.
For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independentWashington
To Calculate EBITDA:
* Calculate net income by obtaining total income and subtract total expenses.
* Determine the total amount of taxes paid to federal, state, and local governments.
* Compute interest fees paid to companies or individuals for the use of credit, or capital.
* Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
* Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
* Add #1 through #5.
EBITDA calculation example:
Net Income 800
+ Taxes paid 240
+ Interest Expenses 160
+ Depreciation 80
+ Amortization 40
= EBITDA 1,320
Some things to watch out for when using EBITDA:
1. They can be misleading number when it is confused with cash flow.
2. They can make even completely unprofitable firms appear to be financially healthy.
3. The numbers are very easy to manipulate.
4. Overlooking cash requirements for growth in accounts receivable is easy to do.
5. Cash requirements for growth in inventories may be missed.
6. The resulting value is not factual when valuing small companies.
7. This method is ineffective for companies without many assets, a small amount of debt, and low amounts of depreciation or amortization schedules.
Cash flow was estimated by using EBITDA to determine whether or not companies could service their debt. Factoring out interest, taxes, depreciation, and amortization can allow an unprofitable business to appear financially healthy. This method of valuation was used extensively during the dotcom era to value unprofitable businesses, with few assets, little earnings, and the results from that method caused many to go bust. This was a blaring example of misapplying EBITDA.
KnowledgeableWashington Washington
The EBITDA number for a specific existing WA pharmacy is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a pharmacy inWashington
Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of aWashington
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Authorship and profile at Google
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.
The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.
For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent
To Calculate EBITDA:
* Calculate net income by obtaining total income and subtract total expenses.
* Determine the total amount of taxes paid to federal, state, and local governments.
* Compute interest fees paid to companies or individuals for the use of credit, or capital.
* Establish the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
* Determine the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
* Add #1 through #5.
EBITDA calculation example:
Net Income 800
+ Taxes paid 240
+ Interest Expenses 160
+ Depreciation 80
+ Amortization 40
= EBITDA 1,320
Some things to watch out for when using EBITDA:
1. They can be misleading number when it is confused with cash flow.
2. They can make even completely unprofitable firms appear to be financially healthy.
3. The numbers are very easy to manipulate.
4. Overlooking cash requirements for growth in accounts receivable is easy to do.
5. Cash requirements for growth in inventories may be missed.
6. The resulting value is not factual when valuing small companies.
7. This method is ineffective for companies without many assets, a small amount of debt, and low amounts of depreciation or amortization schedules.
Cash flow was estimated by using EBITDA to determine whether or not companies could service their debt. Factoring out interest, taxes, depreciation, and amortization can allow an unprofitable business to appear financially healthy. This method of valuation was used extensively during the dotcom era to value unprofitable businesses, with few assets, little earnings, and the results from that method caused many to go bust. This was a blaring example of misapplying EBITDA.
Knowledgeable
The EBITDA number for a specific existing WA pharmacy is important, for the most part, when the existing ownership is establishing their store value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a pharmacy in
Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a
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