By focusing on core earnings, CPAs can assess a company's ability to generate cash flow and meet its financial obligations, offering insights into its operational efficiency and financial health. EBITDA is particularly useful for comparing the performance of different companies, as it provides a standardized measure of operating performance without the impact of varying accounting methods or financing structures.
- KPI: EBITDA
- FORMULA: EBITDA = Operating Profit + Interest Expenses + Taxes + Depreciation Expense + Amortization Expense
- DEFINITION: EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization and is used to objectively measure cash flow and profitability
- SIGNIFICANCE: The internal management value of EBITDA is the subject of some debate, but because it's widely used by banks, VCs and investors, it's important to manage if you’re looking to sell your company, raise capital or acquire a competitor.
- RECOMMENDATION: If too low, consider increasing Operating Profit, reducing senior debt, or both.
Peerview Data provides comparative analytics and benchmarking solutions to accounting firms, enabling them to turn client data into actionable insights, get back in front of clients, and grow consulting revenue.
To watch a brief video of how it works, Click Here.
For more information on the value of measuring financial ratios, read here.