EBITDA calculation is a quick and easy method to measure company's overall financial performance. Simply said, it is a measure of profitability, because it focuses on earnings before interest, tax, depreciation and amortization. It is often used to estimate the worth of a company, but it has its advantages and disadvantages.Advantages of EBITDA:
Disadvantages od EBITDA:
- It is a quick and easy method how to measure company's financial performance.
- It is a good indicator for calculation of basic estimation of company's value.
- It is focused on profitability, but it does not take into account many other indicators and factors, that have impact on overall value of a company (for example some expenses, brand value, further market evolution etc).
- Because of its limitations, EBITDA based company valuation can be used to compare the businesses, that are in the same industry sector and have similar financial and operational attributes.
- It is not a financial measure recognized in generally accepted accounting principles (GAAP). Because EBITDA is a non-GAAP measure, its calculation can vary from one company to another company.
Considering the pros and cons, EBITDA calculation can provide an incomplete picture of company's financial performance. It also can be used to evaluate an approximate worth of a company, but it is not absolutely reliable for this purpose.
The calculation of EBITDA based company's value depends on the industry and the size of a company, so it can be equal from three to seven times EBITDA or even more. According to recommendations, in case of many companies, it should be equal to six or seven times EBITDA.