What is EBITDA? – FreightWaves
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Earnings before interest, taxes, depreciation and amortization (EBITDA) is a measure of a company’s profitability before items below the operating line like other income, interest expense and taxes are taken into account. .
The simplest calculation of EBITDA is to add depreciation charges to operating income or earnings before interest and taxes (EBIT).
EBITDA is useful for comparing the operational performance of companies in the same industry. The calculation removes the differences in the capital structure and the funding methods in place. This is important when comparing a relatively new or emerging entity to a more established entity. A new business, or a business undergoing restructuring or transformation, may invest more heavily in operations than a business that is more advanced in its evolution.
Although the disproportionate share of the investment and subsequent financing represents real costs to the business, these costs are unlikely to remain indefinitely. The idea is that by extracting these non-operating elements from financial performance, two companies, regardless of their stage of maturity, can be easily assessed and compared to each other based on their core operating activities.
A key consideration is the duration of the high level of capital investment.
A company that spends a lot on real estate and equipment in order to develop a new service or a new line of business will incur much higher depreciation expenses than another. By removing expenses, core operational activities are more fairly compared.
Many valuation measures use EBITDA for these same reasons.
Evaluation of actions
Stock market analysts use EBITDA to establish stock price targets for the companies they follow. In addition to using a multiple of earnings per share to create a price target, or price / earnings multiples (P / E), some analysts also assess enterprise value equity versus EBITDA ( EV / EBITDA).
Enterprise value is a look at the total value of a business. The formula is used to measure the withdrawal price of an entity if it were to be acquired. It includes market capitalization, or the market value of outstanding equity, plus debt, which in theory would be repaid to lenders, less cash that the new acquiring company would own.
Some see EV / EBITDA as a more comprehensive method of valuing a newer or transforming business.
Most acquisitions are valued on a multiple of EBITDA.
Net debt to EBITDA
In addition, loan agreements typically establish requirements and covenants based on EBITDA, with net debt to EBITDA being the most common. Standards are set by lenders to ensure that businesses do not become over-indebted and will be able to repay their debt and meet agreed repayment terms.
Net debt to EBITDA is also used by credit rating agencies to assess debt leverage when classifying a company’s credit risk profile.
Adjusted EBITDA is a calculation commonly used in many financial reports.
Most often, Adjusted EBITDA calculations exclude entries considered to be one-time or non-recurring. Examples are: transaction and integration costs associated with acquisitions or disposals, restructuring costs, severance pay, expenses related to IT conversions and certain gains or losses on the disposal of assets.
In trucking, many carriers exclude fuel surcharges from adjusted margin calculations to compare past and current periods without the added noise of fuel price fluctuations.
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