July 23rd, 2009
12:05 PM GMT
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(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.



soundoff (12 Responses)
  1. Jairo Martinez

    Nice and simple. Nice write up Richard. I bet tons of people didnt know what it meant.

    July 23, 2009 at 12:11 pm |
  2. wep`lay.gemisland.com

    I knew about this video thanks to the Twitter comment left by Richard Quest.

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    July 23, 2009 at 12:39 pm |
  3. Sam

    LOL AWESOME !! Keep it up guys!

    July 23, 2009 at 3:49 pm |
  4. Mike Murphy

    EBITDA has another significant use: it's an excellent proxy for cash flow. And in troubled times, it's worth noting that it's not profits as recognized under GAAP regulations that keep companies in business, but actual cash. This is why companies can lose billions of dollars quarter to quarter, but are not bankrupt until they burn through all their cash and are unable to secure more through their creditors.

    July 23, 2009 at 5:27 pm |
  5. mh

    haha..nice video..

    July 23, 2009 at 6:14 pm |
  6. Lyndon Sullivan@lindano on Twitter

    Frankly if i where buying a company with to many EBITDAR in its companies files, i would stay well clear!i think most of these jargon's that appear,& we don't really understand, are usually there for some kind of dressing,or if you like a cover up! but in the end they disappear,when every one knows what they really are,then a new Acronym appears to take its place,& that takes time to understand, etc. Yours Lyndon Sullivan, @lindano on twitter.

    July 23, 2009 at 7:17 pm |
  7. G Chen

    Wonderful explanation..and very entertaining. I'm bookmarking this and sharing with my banker colleagues. Thank you!! ;-)

    July 23, 2009 at 8:59 pm |
  8. chartguy

    There's an old saying about fundamentals: Earnings are what your accountant says they are, but you've got to have cash in the till to pay dividends.

    That's why dividend yield has always been a better barometer than earnings. S&P earnings nearly doubled while the S&P fell almost 50% in the 1973-4 bear market.

    July 23, 2009 at 9:19 pm |
  9. ama

    I must say im studying international business they teach us ebit but not to much about ebitd, im very happy to know more a bout it in a funny way.

    July 24, 2009 at 6:02 am |
  10. Manuel Vilhena

    Controversial concept. EBITDA.

    July 24, 2009 at 8:40 pm |
  11. viagra

    gratefulness you for your report and it helped me in preparing my college assignment.

    August 10, 2009 at 5:54 am |
  12. Diane

    This is why I love quesmteansbusiness.blogs.cnn.com. Love the posts.

    March 10, 2010 at 7:47 pm |

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About Quest Means Business

Quest Means Business airs Monday to Friday, 1600 New York and 2100 London, and is hosted by Richard Quest.

 

 

 
 
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