understanding financial jargon
Earnings Before Interest Tax Depreciation and Amortisation (EBITDA)
When trying to estimate the profits of a company, investment analysts try to get to a 'true' figure. By using Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) rather than a measure like Gross Profit you can include all the operating expenses of actually running the business, but exclude charges which the company has little control over.
For example, the tax rules are not a factor in driving the business and the company can only abide by them. When using EBITDA instead of EBIT, we also exclude amortisation and depreciation from the calculation of profit, since these represents an arbitrary, artificial depreciation of both intangible assets and tangible assets neither of which will have any effect on future cash flows to the company.
A figure such as Gross Profit includes all company expenses (yet to be subtracted) whether the company can control them or not, and whether they are an arbitrary accounting mechanism or not, and so perhaps does not represent as good an estimate of profit in the way the EBITDA does. Some critics argue that EBITDA is misleading since it takes no account of the impact of key decisions on capital expenditure.
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