Creative person working in corporate world. Can someone please help me understand:
\- EBITDA – what does this show compared to revenue??
\- What “below the line” and “above the line” means (like what is this line we’re talking about??”
my creative self thanks you in advance
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– Earnings before interest, taxes, depreciation and amortization. It is a metric to show profitability of the company independent of any “financing” stuff that they’ve done. A company that is able to get better terms on a loan, for example, will show better bottom line profitability, but that doesn’t mean that their core business is stronger. EBITDA strips all that away and talks just about the core business.
– Above-the-line costs are the regularly occurring costs a business accrues in order to make the product or provide the service they offer. The “line” in this scenario represents gross profit. Organizations subtract above-the-line costs from their revenue to determine gross profit. Below-the-line costs are non-repeated or unexpected costs that don’t affect the profit-and-loss account of a company. Below-the-line costs are essential to calculating net profit. To calculate net profit, organizations may subtract below-the-line costs from the gross profit or “line.” Below-the-line costs often provide a more accurate representation of the financial health of a company because inflation doesn’t influence below-the-line costs. Below-the-line costs most often include operating costs, interest and tax.
>EBITDA – what does this show compared to revenue??
Imagine that you and I both start our own baking companies. I take out a huge loan, buy a small building in an urban center with high property taxes, and purchase all the baking equipment outright. You, on the other hand, rent a space in a remote industrial park, and lease all the equipment.
If we sell the exact same products, at the same volumes and prices, when we compare our net incomes, my income will be lower than yours. Why? Because I have depreciation on my building and equipment, interest on my loan, and property taxes, while you will just have rent and lease payments. My business isn’t actually less profitable than yours; our core activity (baking and selling stuff) is exactly the same, but because I made different choices about financing than you, I have different expenses than you.
That’s fine, and normal, but say we had a third party involved, someone who wanted to buy a baking company, and was trying to pick between our two companies. EBITDA lets us make an apples-to-apples comparison between our two businesses in terms of earnings/cashflow that is independent of financing choices.
Revenue is All the money you get, without any subtractions.
Profit is what you get, when you take your revenue, and subtract out ALL your costs.
EBITA is “Earnings Before1.Interest2. Taxes and3. Amortization — which is short for depreciation and amortization
People sometimes like to use this number, and compare it to “EV” – Enterprise Value
When you try to think about the “Value” of a company, you often think about “How much money does this thing throw off”.
Sure, Interest and Taxes and Depreciation all are actual costs, but in some ways they aren’t really INTRINSIC costs to the business itself (machine Depreciation probably is, land amortizaion probably isn’t, so make your own calls about what you want to include). So if you want to think about a businesses POTENTIAL then maybe focusing JUST on revenue, or JUST on profit isn’t exactly right. So this is a slightly different metric kind of like “what is the INRINSIC revenue, unrelated to whatever costs the owners have saddled the firm with”.
Above the Line is TYPICALLY costs directly related to something sold (think flour for a cookie).
Below the Line is TYPICALLY Costs that have to do with the running of the business (think the rent on the store where you sell the cookie, but I mean, in some businesses that might be above the line)
The BOTTOM line is the total profit, after all revenues and costs have been determined.
(these phrases come from how an income statement is typically laid out)
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Earnings are the money left after selling and deducting many of the costs associated with generating those sales.
EBITDA separates a company’s performance from how it pays for its assets (and its tax jurisdiction). It focuses on a company’s core operations to evaluate its performance and allows for comparing companies within the same industry, independent of their asset financing methods.
There are also claims that EBITDA correlates with a company’s cash flow (cash-money generated). Why this is important is that finance defines a company’s value as the value today of the cash flows it will generate in the future.
There are two key lines in income statements. The gross profit (GP) line above which costs associated with producing a product or service are captured, and an EBIT line below GP line where additional operating expenses e.g. management and administration costs and (in this case) depreciation and amortization (recognizing the cost of acquiring assets)
Oof… I keep stumbling into more finance terms, I hope I’m helping and not hindering your understanding.
The idea is to show how the business is doing in actual operation, before costs that aren’t related to those operations.
Basically your business is profitable, but you took out an expensive loan at 20% and live in a high tax state that cut into that, but this lets you see that the business is doing well, and your finances suck.
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