July 23rd, 2009
12:22 PM GMT
(CNN) – The Quest Means Business team has been tasked to try and explain business jargon to its viewers.
We are often guilty of throwing terms around when talking about company results that are difficult to explain in a sentence or two.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is one of those for me.
So I was pleased to delve into it, not only to try and explain it, but also to really get my head around it. Why did companies publish EBITDA figures during the dotcom bubble era? Why do few companies use it now? Why is it not acceptable under so-called U.S. Generally Accepted Accounting Principles (GAAP)?
Ok, I will try and explain it again. Basically (and really basically) it’s a way to express a company’s earnings (the same as net income or profits or the “bottom line”) in a given period. But it is a number that is expressed before the company strips out recurring charges or costs like taxes, interest paid on debt, the loss of value of assets etc. (If I write anymore, I will confuse myself).
Companies use EBITDA (and ITDA and other complication formulae) especially when the number is positive while all others may be negative: “Company X lost six billion dollars last quarter, but EBITDA grew 15 percent!”
To be fair it is a way to try and show a consistent number if a new company is growing fast and spending huge amounts of money so it has no hopes of turning a profit. That is why it became a popular number during the late 1990s.
Today, private equity likes to look at EBITDA figures during a potential takeover because it helps to clarify a company’s underlying ability to earn money.
Is it any clearer to you now?
If not, the video below shows me trying to explain it to a classroom full of children. They were enthusiastic to learn and were shouting “EBITDA” when we packed up to leave their London school.
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