Brian Feroldi
I demystify the stock market | Author, Speaker, Creator | 100,000+ investors read my free newsletter (see link)
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EBITDA Explained SimplyEBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation & Amortization.EBITDA is a major financial indicator used to evaluate companies' profitability with different capital structures.EBITDA is a rough guide to show how much cash a business generates.Calculating EBITDA requires information from the company's Income Statement and Cash Flow Statement.Here's one way to do it:Net Income+ Interest Expense (Income Statement)+ Taxes (Income Statement)+ Depreciation (Cash Flow Statement)+ Amortization (Cash Flow Statement)Some investors love EBITDA. Others despise it.EBITDA does not consider all business activities, so it might overstate cash flow.Charlie Munger calls EBITDA "Bullsh*t Earnings"Why? Because it ignores depreciation as an expense.Depreciation is when a tangible asset's value is gradually reduced over time to account for wear and tear.The equipment will eventually be replaced, so depreciation is an actual expense. This is why ignoring it when calculating profits can be a big mistake.Buffett & Munger prefer to look at EBT -- Earnings Before Taxes. This allows them to compare the earnings yield on a business to the earnings yield on bonds (which is also a pre-tax number).Do you use EBITDA? Let me know in the comments below!***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Get started here (It's free) → https://lnkd.in/eKbRV7g6If you enjoyed this post, please repost ♻️ to share with your audience.
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Brian Feroldi
I demystify the stock market | Author, Speaker, Creator | 100,000+ investors read my free newsletter (see link)
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I prefer EBIT & EBT over EBITDA. Here's how to calculate those (and a few other important metrics).
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Saurav Sen, CFA
Research Analyst | Investor | Founder
1mo
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I find EBITDA minus Maintenance Capex more useful. Some companies explicitly quantify Maintenance Capex, most don't. In that case, I compare Depreciation to Capex (both on the cash flow statement) and if Dep < Capex, I assume Dep. is a reasonable estimate of Maintenance Capex. Otherwise I use the whole Capex number, which could overestimate Dep. but probably apt for firms that book their R&D as an expense item in the income statement before the EBITDA line). Hope this helps anyone who's nerding out on this on Saturday! 😀
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John Cheek
Vice President, Intellectual Property & Legal Operations at Tenneco
1mo
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This is a helpful reference for newbies, but I worry that the red shorthand yes is misleading. Direct labor is in COGS and general expenses are more - often much more - than costs paid to employees (some of which are in COGS). Hopefully anyone really looking to understand EBITDA will look closer at the underlying expense categories.
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John Stuller, CPA, MAcc
1mo
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EBITDA is not recognized as a Generally Accepted Accounting Principle by the FASB/SEC. It was originally created by an executive in the late 70s to argue for a higher bonus.
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Stephen Boras
Executive Vice President, Head of Model Risk Management & Validation
1mo
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It is vital for “quants” to have a basic understanding of what they’re modeling. Thus, all “data scientists” claiming to build AI corporate finance or credit risk models, MUST know if depreciation is a source or use of cash (that’s sort of a trick question), and the difference between operating cash flow and EBITDA.
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Gaurav Jain, MBA 🚀
Transforming Global Pharmaceutical Projects Via Strategic Alliance Management | Ensuring Sustainable & Scalable Business Outcomes | International MBA | Ex-Pfizer | Ex-Abbott | CDMO | CRO | 🇮🇳 ️🇫🇷 🇫🇮 🇨🇭
1mo
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While EBITDA offers a glimpse into a company's operating health, it's crucial to recognize its limitations. It can paint an unrealistic picture by overlooking cash flow, capital needs, and debt burdens. Additionally, varying calculation methods make comparisons tricky. Overemphasizing EBITDA can distract from essential metrics and underlying issues. Therefore, use it cautiously, alongside other financial indicators, and avoid basing decisions solely on this single measure.
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Sumit Chanda
CEO & Founder at JARVIS INVEST
1mo
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Brian Feroldi One major concern of EBITDA is that it excludes important elements such as interest, taxes, and capital expenditures, which can provide a skewed picture of a company's overall financial health. Additionally, EBITDA doesn't account for changes in working capital, and its reliance on depreciation and amortization can mask the need for ongoing capital investments. Therefore, using EBITDA alone may overlook crucial aspects of a company's financial situation and should be complemented with a comprehensive analysis.
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Josh Aharonoff, CPA
Fractional CFO | 300k+ Finance & Accounting Audience | Founder & CEO of Mighty Digits
1mo
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The most misunderstood metric…explained simply. Nicely done!
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Fernando Blanco
JHSF Capital | CRO | COO | Conselheiro | Mentor | Palestrante | Autor | Professor de MBA | Diretor de Crédito | Gestão de Riscos | Mercado Financeiro | International Banking
1mo
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I am a member of The EBIDTA Despise Club", but I disagree with Munger (RIP, great man).Here in Brazil, one cannot oversee the working capital needs and loans' principal payments.That's why I'm the founder of The Cash Flow Statement Lovers Society.
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thanks for this Brian Feroldi !EBITDA Explained SimplyEBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation & Amortization.EBITDA is a major financial indicator used to evaluate companies' profitability with different capital structures.EBITDA is a rough guide to show how much cash a business generates.Calculating EBITDA requires information from the company's Income Statement and Cash Flow Statement.Here's one way to do it:Net Income+ Interest Expense (Income Statement)+ Taxes (Income Statement)+ Depreciation (Cash Flow Statement)+ Amortization (Cash Flow Statement)Some investors love EBITDA. Others despise it.EBITDA does not consider all business activities, so it might overstate cash flow.Charlie Munger calls EBITDA "Bullsh*t Earnings"Why? Because it ignores depreciation as an expense.Depreciation is when a tangible asset's value is gradually reduced over time to account for wear and tear.The equipment will eventually be replaced, so depreciation is an actual expense. This is why ignoring it when calculating profits can be a big mistake.Buffett & Munger prefer to look at EBT -- Earnings Before Taxes.This allows them to compare the earnings yield on a business to the earnings yield on bonds (which is also a pre-tax number).Do you use EBITDA? Let me know in the comments below!***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Get started here (It's free) →https://lnkd.in/eKbRV7g6If you enjoyed this post, please repost ♻️ to share with your audience.
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Musab Al-Qurashi , EM
Operations Superintendent at Ma'aden Aluminium Company• KFUPM Buisness SchoolLeadership | Cost Optimization | Lean Manufacturing | PMP | Engineering Management | Risk Management | Polymer | Alumina Refinery | Operation
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Very good simplification of critical finantial terms.
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Kyiv University of Market Relations
199 followers
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That's a very good explanation and infographic, easy to consume and insightful for those who would like to understand key financial KPIs, such as EBITDA and EBIT.
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Max R. Brewer
Consultant
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Once. I worked for a company that used EBITDA as reasoning for cutting sales commissions. The concept was poorly explained and presented, and none of us bought into the reasoning.As we all left the meeting dumbfounded, the CFO blurted out that “ Michael Jordan gets EBITDA!!!” Wow, that little factoid just made us all feel so much better.No. Leadership. Whatsoever.Six months later, the company sold after the owner had a stroke. The CFO was dismissed along with all legacy management soon after.Karma.Be careful how you justify using this term/concept, or your organization will be demoralized.Leadership is much more than acronyms.
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Sharon C.
Passionate Inventory Optimization Consultant and E-commerce Growth Advisor
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I love this post so much and must repost it. This is the most simple and well-explained #basicaccounting I have ever seen.
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Wajid Ur Rehman Janjua
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Good to read
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Michael S.
BComm, Finance Major, Graduating Summer 2024 — Associate Mobile Mortgage Specialist at TD — 13+ Years Financial Services Experience — Seeking Full-Time Roles in Finance, Investments, Real Estate, Consulting
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Excellent visual representation of the key income statement items! It’s important to see the bigger picture and understand the interrelation between these items, especially when considering the intricate links between finance and accounting.
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Olivier Arturo P.
Hi I´m Olivier. Creating value to the world! MBA, Civil Engineer. #ProjectManagement #Construction. #ICOPlife
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An easy way to understand the Income Statement
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Yuriy Grygoryev, MBA, MEng
Manager, Equipment and Civil Engineering at Rogers Communications
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That's a very good explanation and infographic, easy to consume and insightful for those who would like to understand key financial KPIs, such as EBITDA and EBIT.
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Greg Pierce
Associate Teaching Professor of Finance at Penn State University
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EBITDA is NOT Free Cash Flow, although some use it as a quick substitute. Find out the details about EBITDA from Brian Feroldi.
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