EBITDA – why it’s important when looking for finance.

EBITDA – why it’s important when looking for finance.

The term EBITDA is often used to evaluate the financial performance of a business. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is an important metric that Business analysts use to assess a company’s financial health, profitability, and overall value.

To understand EBITDA, let’s break down the acronym:

  • Earnings: This refers to the profit that a company generates from its operations.
  • Before: This indicates that the calculation is done before other expenses are accounted for.
  • Interest: This refers to the cost of borrowing money. If a company has a loan, it will have to pay interest on that loan, which is a business expense.
  • Taxes: This refers to the taxes that a company has to pay on its income.
  • Depreciation: This refers to the decrease in the value of assets over time. For example, if a company buys a machine for £10,000 and uses it for five years, the machine’s value may have decreased to £5,000 by the end of the five years.
  • Amortisation: This is similar to depreciation, but it applies to intangible assets, such as patents or trademarks.

Why is EBITDA important when looking for business finance?

EBITDA is often used as a measure of a company’s operating cash flow because it excludes non-operating expenses such as interest, taxes, depreciation, and amortization. This makes it a useful metric for evaluating a company’s ability to generate cash from its operations.

When seeking financing for a business, potential lenders will want to evaluate the financial health of the company. One key metric they may use is EBITDA. EBITDA let’s lenders assess its ability to repay debts.

However, it’s important to note that EBITDA is not a perfect metric, and isn’t the only metric used to evaluate a company’s financial performance.

In conclusion, EBITDA is an important metric that can provide valuable insights into a company’s financial health, profitability, and cash flow. However, lenders will use it in conjunction with other metrics and evaluation methods to make informed decisions.

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