If you work for a large organization or perhaps in an industry with fierce competition, you’ve probably heard the acronym EBITDA thrown around a lot. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Put simply – EBITDA provides you the earnings performance for an organization purely based on the core operations. Stripping out non-operational costs enables effective benchmarking with companies in direct competition with one another regardless of company structure. Included below is an example to illustrate the importance and purpose of this metric.
Suppose you are a major retailer and would like to compare your performance with that of your competitors as way to adjust your strategic plan and budget for the coming year. If your company has financed most of its operations through debt, the associated interest should be removed from your calculation to provide comparable analysis. If you produce the goods you sell in-house via capital assets but your competitors outsource production, the depreciation associated with those capital assets should also be eliminated from the equation. The same holds true for taxes and amortization. While the bottom line can provide valuable insight to a company’s performance, it can also be misleading if misapplied. The last thing you want to do is make important business decisions with misleading information. For your benchmarking results to be meaningful, make sure you compare apples to apples – EBITDA is a great metric to use in this context.
Contact your CPA or your local accountant, like TGG Accounting, to learn how EBITDA impacts the value and strategy in your business.Written by: Andrea Murray TGG Accounting