What is EBITDA?

The meaning of EBITDA is a financial indicator that seeks to specify the profits or the profit achieved by a company or project, without taking into account taxes, financial expenses and other accounting expenses that do not imply the outflow of cash, such as Amortization, interest, taxes and depreciation.

The main utility of EBITDA is that it presents the results of a project without assessing tax and financial factors, so they will not alter the development of the project and its final result.

It is used quite frequently to analyze the ability to create profits of a company, taking into account only the productive activity, which will be responsible for collecting the result achieved by the direct exploitation of the business.

By not collecting all the expenses of the organization, more clearly reflects the money you have left to pay off your debts. Sometimes it is considered a somewhat misleading ratio, where if it is confused with the cash flow it can be dangerous when analyzing the health status of the organization.

How is EBITDA calculated?

The term EBITDA is derived from the English expression Earnings before interest, taxes, depreciation and amortization, which means profit before interest, impuestos, Depreciation and amortization.

The EBITDA formula would be the following:

EBITDA = Revenues - costs of traded goods - general administration costs

In the income statement, EBITDA is placed above the gross profit operating, which is the same as EBITDA but with the discount of amortizations and provisions.

There are a number of very important considerations when analyzing EBITDA:

  • Do not replace it with the cash flow.
  • The earnings that appear reflected are without counting certain expenses, so they can seem quite high at first glance.
  • In order to carry out an in-depth analysis of the companies, the quality of the profits made should be taken into account.

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