If you do not understand what the term EBITDA means, now is the time to take a closer look. EBITDA can determine the value of your business. There are some issues to keep in mind while using this revenue calculation. Here is a closer look at EBITDA.

EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. You can use it to compare the financial strength of two different companies. Many people don’t feel that EBITDA should have the importance that is frequently attributed to it.

Divided Opinion on EBITDA

Why is EBITDA used so often if there is disagreement on it being able to determine the value of a business? EBITDA takes the complicated subject, determining and comparing the value of businesses, and condenses it down to an easy to understand and implement formula. This formula generates a single number.

EBITDA Ignores Some Key Factors

One key concern when using or considering an EBITDA number is that it is often used as a substitute for cash flow. This can make it dangerous. It is vital to remember that earnings and cash earnings are not necessarily the same thing. Adding to the confusion is the fact that EBITDA does not factor in interest, taxes, depreciation or amortization. A lot of vital information is ignored.
Achieving Optimal Results

You don’t want to place too much emphasis on EBITDA when determining the strength of a business. The calculation overlooks too many factors that could influence future growth and prosperity of a business.

Business brokers perform valuations to determine the approximate value of a business. Since valuations take many more factors into consideration, they also tend to be far more accurate. EBIT Associates provides independent and objective valuation advisory services, which range from merger and acquisition transactions to asset appraisal and strategic planning.

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AUTHOR: EBIT Associates, Ltd.
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