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DarkRange55
Enlightened
- Oct 15, 2023
- 1,699
EBITDA is like this weird adjusted cashflow method it looks like where you add back interest, taxes, depreciation, amortization. Whereas on the statement of cashflows you also add back depreciation & amortization but you have other stuff that they add back. Its all the non-cash expenses and accounts where it changes working capital on the balance sheet. So you're actually seeing where the cash went.
So why not just use the statement of cashflows?
Good question.
Yes, simple cashflows are decent approximations, but when you take value based finance, people try adjust for all tax based (interest and debt) and other frictions... that way you have some sort base and comparable cashflows to value investment decisions and company value. EBITDA is a more comparable view of the profitability of the business ex all the out her expenditures. Like if they cut back, what is the profitability.
There are two types of cashflow statements, Direct and Indirect cashflow statements. I prefer the Direct method (used seldom these days) because it shows if sales are increasing and other items the indirect method doesn't show.
Think of it this way, EBITDA can be adjusted based on someone buying out a company and running the company. If you purchase the company, merge it into your company, or do an IPO with your company, you can eliminate debt, add debt, reduce taxes by an offsetting company's carbon credits, depreciation, government credits or losses. So, knowing if you're a buyer or a seller of a company, you can re-jigger the overall companies bottom line based on what you(combining or spinning off companies) can bring to the table.
Sometimes the whole is worth more in pieces. Sometimes pieces put together are worth more due to efficiencies.
www.investopedia.com
So why not just use the statement of cashflows?
Good question.
Yes, simple cashflows are decent approximations, but when you take value based finance, people try adjust for all tax based (interest and debt) and other frictions... that way you have some sort base and comparable cashflows to value investment decisions and company value. EBITDA is a more comparable view of the profitability of the business ex all the out her expenditures. Like if they cut back, what is the profitability.
There are two types of cashflow statements, Direct and Indirect cashflow statements. I prefer the Direct method (used seldom these days) because it shows if sales are increasing and other items the indirect method doesn't show.
Think of it this way, EBITDA can be adjusted based on someone buying out a company and running the company. If you purchase the company, merge it into your company, or do an IPO with your company, you can eliminate debt, add debt, reduce taxes by an offsetting company's carbon credits, depreciation, government credits or losses. So, knowing if you're a buyer or a seller of a company, you can re-jigger the overall companies bottom line based on what you(combining or spinning off companies) can bring to the table.
Sometimes the whole is worth more in pieces. Sometimes pieces put together are worth more due to efficiencies.
![www.investopedia.com](/proxy.php?image=https%3A%2F%2Fwww.investopedia.com%2Fthmb%2FnP9TKDjQw2rFNZ6nqE-w7A8HQvU%3D%2F1500x0%2Ffilters%3Ano_upscale%28%29%3Amax_bytes%28150000%29%3Astrip_icc%28%29%2Febitda-final-acc54b87f5944495a720acb8e2fd3b78.png&hash=649c23fbae8c6f03303fac70e7bf99e0&return_error=1)
EBITDA: Definition, Calculation Formulas, History, and Criticisms
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternative measure of a company's overall financial performance.