In episode 73 of the Leadership Minute, professional services industry CFO Manny Korakis, in his debut video for Acceleration Economy, explains the financial concept known as EBITDA: What it means and why it’s so important.
00:54 — Before getting into EBITDA, Manny introduces GAAP, which stands for “generally accepted accounting principles.” It’s a set of rules that accountants use to record transactions and generate financial statements, such as a balance sheet, a statement of cash flows, or an income statement.
01:16 — Manny says that you’ve probably noticed a line item at the bottom of income statements called “net income,” which represents the net profit of an organization in accordance with GAAP. EBITDA, or “earnings before interest, taxes, depreciation, and amortization,” begins with that net income number from the income statement and proceeds to exclude interest, taxes, depreciation, and amortization.
01:55 — Why are those items excluded? To explain, Manny takes a brief look at each one. Ultimately, while interest, taxes, depreciation, and amortization are important, they’re not really representative of core business performance, so EBITDA excludes those items in an attempt to give you a metric that shows true business performance
03:02 — But it’s not perfect, so, in many cases, you’ll hear of another metric that companies use, which is adjusted EBITDA. Adjusted EBITDA starts with the EBITDA that Manny just defined, but excludes one-time or non-recurring charges such as restructuring expenses or advisor and mergers and acquisitions transaction fees.
03:34 — Why is EBITDA so important? Manny says that, in many cases, companies and people use EBITDA as a starting point to determine the valuation of a company, and gives an example.
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