Explain EBITDA and how it is used as an alternative to net income.

Question

Accepted Answer

EBITDA is a financial metric used to evaluate a company's operating performance by excluding non-operating expenses.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
It provides a clearer picture of a company's profitability from its core operations.
EBITDA is used as an alternative to net income because it excludes non-operating expenses, which can vary widely between companies.
Investors and analysts use EBITDA to compare the operating performance of different companies within the same industry.
For example, Company A may have a higher net income due to lower depreciation expenses, but a lower EBITDA compared to Company B.
EBITDA is also used in valuation metrics such as EV/EBITDA multiples.
However, EBITDA has limitations as it does not account for capital expenditures or changes in working capital.

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