EBITDAC

Even though the venerable business term, EBITDA (earnings before interest, taxes, amortization, and depreciation) is not recognized as a generally accepted accounting principle, the term as become the de facto measurement of profitability when a company is raising capital or being sold.

What is EBITDA and why is it used?

EBITDA attempts to explain a company’s profitability if it operated in a vacuum and did not earn or pay interest, pay taxes, buy equipment, or finance acquisitions. In other words, it is a measurement of how much money a company would make if all those exogenous factors are removed and the company did one thing only: make and sell its product or service.

And why would this measure of profitability be used?

The idea of EBITDA is to provide some sort of common benchmark metric for valuing companies for investment or acquisition. EBITDA is not all encompassing, it ignores capital expenditures, and worse, “adjustments” to EBITDA are often utilized to explain away one-time-only expenses or expenses that will cease after the transaction is completed. So EBITDA is not perfect, but it does provide a consistent method of measurement, and thus an “apples to apples” comparison of the relative profitability of different companies is possible.

The recent covid-19 pandemic has disrupted many companies and caused a drop in revenues and profits. These disruptions, of course, have had an adverse effect on the ever-so-important EBITDA calculation. Happily, many investors and acquirers are seemingly willing and able to make allowances for these dips and thus, a new term as been born. EBITDAC – earnings before interest, taxes, amortization, depreciation, and coronavirus.

How have the changes of the past few months impacted your business? What is your opinion of, and dare I say, willingness to make adjustments to earnings to account for the impact of the virus? Let me know by replying to this post, sending me a direct message, or sending an email to [email protected]