The Pros and Cons of Using Ebitda as a Performance Measurement for Businesses

1355 Words6 Pages
EBITDA is an acronym standing for Earnings Before Interest, Taxes, Depreciation, and Amortization. Although EBITDA is not a financial metric recognized in generally accepted accounting principles (GAAP) , it has become widely used over the past 30 years when assessing the performance of companies. It is intended to allow a comparison of profitability between different companies, by canceling the effects of interest payments from various financing measures, political factors (i.e. taxes), and the inherent subjectivity found in the quantifying of depreciation and amortization. While this financial metric has become popular as a measure of profits and as a measure of corporate health and value, it has also been very polarizing in how it is viewed in certain circles. Some regard it as an accurate indicator of value, while others regard it as a “fairy tale told to investors and credit managers so that they go to sleep happy instead of running for the hills.” I have been asked by the President of my engineering firm to look into this metric and gather a better understanding of what it can mean for us in analyzing the health of our own company. In the pages ahead, I will analyze the PROs and CONs of using EBITDA, and will also present some differing viewpoints held currently by the experts. By several accounts, the use of EBITDA became increasingly popular in the 1980s. It was used originally as leveraged buyout investors examined distressed companies that needed financial restructuring. They used EBITDA to calculate quickly whether these companies could pay back the interest on certain financed deals. It quickly evolved into a tool to determine whether a company could pay back its debt in the near term. Because EBITDA helps measure the company’s underlying profit, banks and other sources of capital tended to use EBITDA when determining how much money they could

More about The Pros and Cons of Using Ebitda as a Performance Measurement for Businesses

Open Document