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EBITDA Concept
EBITDA (acronym of the English expression
“earnings before interest, taxes, depreciation and amortization”), also
designated as operational cash-flow, is a financial-economical indicator
that seeks to evaluate the company’s capacity in auto financing new
investments and cope with the charges with the debts, through its
operational activity. Likewise, allows to evaluate the potential of a
still young company or that have recently been through a restructure
process, to the extent that allows to know the released by the
operational activity before this is subject to taxes and charges
associated to the funding.
On the other hand, when expunging the
taxes from the results, the values that depend directly from the
investment politics and the financing options and the costs that don’t
represent a financial movement and that depend of internal accountancy
politics (depreciation and other adjustments of asset values), this
indicator is also the most adequate to evaluate the company’s
performance and to compare it with other companies of similar dimension
and characteristics.
EBITDA restrictions: To refer, however,
that this indicator used alone, such as it happens with many other
indicators, can originate deceiving conclusions in the gauge that the
company’s economical and financial health diagnostic is found to be
incomplete. In fact, when expunging the results of the financial charges
and the tax charges, we do not have a complete perspective of the
cash-flow and, therefore, the company’s capacity to auto finance new
investments. On the other hand, depreciation and adjustments of asset
values can be options at a certain time but cannot be eternally delayed;
it is therefore needed to reflect on the results its effects as way to
know the company’s financial health.
EBITDA possible uses: Thus defined, EBITDA
or Operational Cash-Flow represents the company’s capital release
capacity to finance:
. CAPEX (this is,
new investments in fixed capital)
. Working Capital Investments
. Tax Payment
. Charges with Debt Payments
. Debt Reduction and/or cash accumulation
. Shareholders’ salary through dividends
distribution
Calculation Formula:
(+) Net Results
(+) Depreciation and Other Adjustments
(+) Financial Funding Charges
(+) Tax over Profits
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(=) EBITDA
Translated from Portuguese
by Susana Saraiva, Portuguese-English and English-Portuguese translation
specialist. Contact: spams@sapo.pt.
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