EBITDA Concept
EBITDA (acronym of the English expression “earnings before interest, taxes, depreciation and amortization”), also designated as operational cash-flow, is a financial-economical indicator that seeks to evaluate the company’s capacity in auto financing new investments and cope with the charges with the debts, through its operational activity. Likewise, allows to evaluate the potential of a still young company or that have recently been through a restructure process, to the extent that allows to know the released by the operational activity before this is subject to taxes and charges associated to the funding.
On the other hand, when expunging the taxes from the results, the values that depend directly from the investment politics and the financing options and the costs that don’t represent a financial movement and that depend of internal accountancy politics (depreciation and other adjustments of asset values), this indicator is also the most adequate to evaluate the company’s performance and to compare it with other companies of similar dimension and characteristics.
EBITDA restrictions: To refer, however, that this indicator used alone, such as it happens with many other indicators, can originate deceiving conclusions in the gauge that the company’s economical and financial health diagnostic is found to be incomplete. In fact, when expunging the results of the financial charges and the tax charges, we do not have a complete perspective of the cash-flow and, therefore, the company’s capacity to auto finance new investments. On the other hand, depreciation and adjustments of asset values can be options at a certain time but cannot be eternally delayed; it is therefore needed to reflect on the results its effects as way to know the company’s financial health.
EBITDA possible uses: Thus defined, EBITDA or Operational Cash-Flow represents the company’s capital release capacity to finance:
- CAPEX (this is, new investments in fixed capital)
- Working Capital Investments
- Tax Payment
- Charges with Debt Payments
- Debt Reduction and/or cash accumulation
- Shareholders’ salary through dividends distribution
Calculation Formula:
(+) Net Results
(+) Depreciation and Other Adjustments
(+) Financial Funding Charges
(+) Tax over Profits
—————————————–
(=) EBITDA
