An acronym is an abbreviation that is formed from the initial letters of a phrase or expression. When an acronym is pronounced like a word, it is called an acronym.
On this occasion, we are going to focus on an acronym frequently used in the field of economics and finance: ebitda, which comes from the English expression “Earnings Before Interest, Taxes, Depreciation and Amortization” (that is, “Profits before Interests”)., Taxes, Depreciation and Amortization”).
According to Abbreviationfinder, Ebitda is an acronym that comes from an English expression that can be translated as Earnings before Interest, Taxes, Depreciation and Amortization.
What is ebitda
The EBITDA, therefore, is the indicator that reflects the gross operating profit obtained by a company, before applying the deduction of financial expenses (interest, taxes, etc.). The usefulness of EBITDA in an analysis varies according to multiple factors and is questioned by some specialists.
For many economists, the EBITDA is important since it allows comparisons to be made without the distortion produced by those financial expenses that, in the future, can be compensated and, therefore, improve the result.
The purpose of EBITDA is to show whether a company wins or loses by developing its core business. That is why it leaves out tax payments, interest payments and the fall in value caused by amortization and depreciation.
What is it for
It is relevant to mention that EBITDA cannot only be used to compare the performance of two companies. It can also be used to compare how a firm fared in different periods, always focusing on its core business and discarding other data.
On the other hand, it must be taken into account that the EBITDA does not show the cash flow of the business. This is because it ignores the investments made in fixed assets and the changes that occur in working capital.
The gross operating profit that a company achieves is reflected in the EBITDA.
EBITDA and OIBDA
In the field of finance and economics, it is also common to come across the acronym OIBDA, another technical term of English origin: it is the Operating Income Before Depreciation and Amortization, and its original version is Operating Income Before Depreciation and Amortization. In simpler words, this concept represents the difference between expenses and income as a result of commercial activity that is neither accounting nor financial.
The activity included in OIBDA is that which a company carries out before accounting for the loss of assets due to the passage of time and use. It is important to point out that this indicator is of no use to the company, since it does not reflect its true state.
Ebitda, on the other hand, can be used to control the profitability of a business, because it is based on the profits and losses of the company. The reason that we can base ourselves on the EBITDA to make a comparison of the results of one or more companies over a certain period of time is that it is not based on tax or financial issues or on accounting expenses that do not entail an output. of money.
In order to carry out this comparison, the EBITDA involves dividing the term to be analyzed by the investment made by the companies involved or by the sales they made in the same period. This gives us a ratio that is directly proportional to the operational efficiency of the firm.
This measurement of results makes it possible not to involve certain tax and financial issues, or amortization and depreciation, to find a result that goes beyond the events that could take place in certain companies due to issues such as a certain tax treatment, the quantification of its depreciations or financing that is extraordinarily favorable.