Pros and cons of EBITDA
Pros of EBITDA
EBITDA is useful for comparing the financial strength of two companies, because it creates a singular measure of performance, which can then be applied across industries. It considers the differences in expenses and rates, and allows analysts to focus on the outcome of operating decisions rather than imposed taxes and payments.
EBITDA is also commonly used in valuation ratios, such as assessing businesses that have high-value expenses, which can detract from net profits.
Cons of EBITDA
The main drawback of the EBITDA metric is that there is the potential for different components to be included, or excluded, by different companies. This can be misleading to traders and analysts. EBITDA can be used to present financial decisions to a company’s advantage, by excluding any debts – this is known as ‘window dressing’ accounts.
Today, most companies will report an EBITDA figure as part of their regular earnings releases. This isn’t mandatory; however, since it’s not one of the Securities and Exchange Commission’s generally accepted accounting principles (known as GAAP).
When using the EBITDA metric, it is important to look at other factors and performance indicators to ensure the company is not intentionally deceiving investors with its accounting figures.