EBITDA's full form is earning before interest, tax and depreciation and amortization. All most all the companies calculate EBITDA for checking their performance. For calculating it, we deduct all the expenses from revenues except interest, tax and depreciation and amortization.

If we have already deducted interest, tax and depreciation and amortization, we can add it for calculating EBITDA. EBITDA is the good measurement of profitability of any company. A company with high EBITDA, it means, it is performing good and it can easily pay interest on debt. EBITDA can be compared. By taking different companies' EBITDA in same industry, we can calculate the difference between them. Better performing company can be followed by others.

Why is EBITDA Important?

1. Question is very simple and answer is also very simple. Our net income is not show the operating profitability result because we have deducted interest on debt, tax and depreciation. Because business operation is different from all these expenses. If we deduct only the business expenses from business incomes, then, we can tell that a company has the operating profit in given figures. So, we can measure its exact performance. How much company has earned money by purchase, production and sale activities.

2. For calculation of leverage, we need to calculate EBITDA. Leverage is Debt / EBITDA. This shows the relationship between total debt and earning before interest, tax and depreciation. It is 3 or more, then it is not good.

3. On the basis of EBITDA, we can calculate interest coverage ratio. Interest coverage ratio is  EBITDA / interest expenses.

4. If any company has large numbers of fixed assets or intangible assets and long term debt, it means, every year, there will be big amount of depreciation and amortization and interest. If it will deduct from operating earning, our operating earning will not show exact earn money from manufacturing or trading. So, it is necessary to calculate earning before interest, tax, depreciation and amortization.

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Accounting Education: EBITDA
Accounting Education
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