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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>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.
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