By Brad MacLiver
Authorship and profile at Google
EBITDA is an acronym that stands for: earnings before interest, taxes, depreciation and amortization. It is often used to measure the value of some businesses and also is used in the comparison of similar companies.
Generally speaking, EBITDA is an easy method to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs such as interest. This factors can vary depending on the management’s choice of financing or taxes, which can fluctuate depending on acquisitions or losses from prior years. Also, arbitrary factors of depreciation and amortization are a factor.
The EBITDA formula can be used as a guideline when valuating larger companies or when comparing the profitability of large similar companies in the same industry.
To effectively use EBITDA, these larger companies should possess their significant assets, keep heavy amortization schedules, or bear significant amounts of debt. Considering independentColorado
Method To Calculate EBITDA: 1. First, calculate net income by obtaining the total income and subtracting total expenses.
2. Determine the total amount of taxes to be paid to federal, state, and local governments.
3. Calculate interest fees that are paid to companies or individuals for the use of credit or capital.
4. Establish the total cost of depreciation. This is the expense recorded to allocate a tangible asset's cost over its useful life.
5. Calculate the cost of amortization. This is the expense for consumption of the value of intangible assets such as goodwill, patents, or copyrights over either a specific period of time or the asset's expected life.
6. Add the values in steps #1 through #5.
An example of EBITDA calculation:
1. Net Income 1,100
2. + Taxes paid 310
3. + Interest Expenses 205
4. + Depreciation 90
5. + Amortization 55
6. = EBITDA 1,760
Drawbacks of EBITDA: 1. Can be misleading number when it is confused with cash flow.
2. Can make even completely unprofitable firms appear to be financially healthy.
3. Numbers are easy to manipulate.
4. Can overlook cash requirements for growth in accounts receivable.
5. Can miss cash requirements for growth in inventories.
6. Not factual when valuing small companies.
7. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
During the 1980s EBITDA was being used as a proxy for cash flow in leveraged buyouts to calculate whether 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.
KnowledgeableColorado Colorado
The EBITDA number for a specific existing 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 inColorado
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 CO pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.
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Authorship and profile at Google
EBITDA is an acronym that stands for: earnings before interest, taxes, depreciation and amortization. It is often used to measure the value of some businesses and also is used in the comparison of similar companies.
Generally speaking, EBITDA is an easy method to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs such as interest. This factors can vary depending on the management’s choice of financing or taxes, which can fluctuate depending on acquisitions or losses from prior years. Also, arbitrary factors of depreciation and amortization are a factor.
The EBITDA formula can be used as a guideline when valuating larger companies or when comparing the profitability of large similar companies in the same industry.
To effectively use EBITDA, these larger companies should possess their significant assets, keep heavy amortization schedules, or bear significant amounts of debt. Considering independent
Method To Calculate EBITDA: 1. First, calculate net income by obtaining the total income and subtracting total expenses.
2. Determine the total amount of taxes to be paid to federal, state, and local governments.
3. Calculate interest fees that are paid to companies or individuals for the use of credit or capital.
4. Establish the total cost of depreciation. This is the expense recorded to allocate a tangible asset's cost over its useful life.
5. Calculate the cost of amortization. This is the expense for consumption of the value of intangible assets such as goodwill, patents, or copyrights over either a specific period of time or the asset's expected life.
6. Add the values in steps #1 through #5.
An example of EBITDA calculation:
1. Net Income 1,100
2. + Taxes paid 310
3. + Interest Expenses 205
4. + Depreciation 90
5. + Amortization 55
6. = EBITDA 1,760
Drawbacks of EBITDA: 1. Can be misleading number when it is confused with cash flow.
2. Can make even completely unprofitable firms appear to be financially healthy.
3. Numbers are easy to manipulate.
4. Can overlook cash requirements for growth in accounts receivable.
5. Can miss cash requirements for growth in inventories.
6. Not factual when valuing small companies.
7. Not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
During the 1980s EBITDA was being used as a proxy for cash flow in leveraged buyouts to calculate whether 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 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 CO pharmacy. Instead of the EBITDA number, pharmacy buyers should be focusing on sales, gross profit, cash flow, and customer mix.
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