By Brad MacLiver
Authorship and profile at Google
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.
The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.
For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies inSouth Dakota
Calculating EBITDA is done by:
1. Determining net income by obtaining total income and subtract total expenses.
2. Calculating the total amount of taxes paid to federal, state, and local governments.
3. Establishing interest fees paid to companies or individuals for the use of credit, or capital.
4. Determining the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Calculating the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
6. Add #1 through #5 together to determine the EBITDA.
EBITDA calculation example:
1. Total Income 1,820
2. + Total Taxes paid 472
3. + Interest Fees 266
4. + Depreciation Costs 133
5. + Amortization Costs 66
6. = EBITDA 2,757
There are drawbacks of EBITDA that should be taken into account. EBITDA can be misleading number when it is confused with cash flow, and they an make even completely unprofitable firms appear to be financially healthy. The numbers are easy to manipulate and they are not factual when valuing small companies. With EBITDA, it is easy to overlook cash requirements for growth in accounts receivable, as well as miss cash requirements for growth in inventories. EBITDA is also not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
EBITDA was being used during the 80's as a means of determining approximate cash flow in leveraged buyouts in order to determine whether companies could service their debt. By factoring out taxes, interest, amortization, and depreciation, this formula can allow an unprofitable business to appear financially healthy. This method of valuation was used extensively during the dotcom era to value unprofitable businesses, with few assets, little earnings, and the results from that method caused many to go bust. This was a blaring example of misapplying EBITDA.
Knowledgeable SD pharmacy specialists performing pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialtySouth Dakota
The EBITDA number for a specific existing pharmacy is important, for the most part, when the existing ownership is establishing their drug store's value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling aSouth Dakota
Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a pharmacy inSouth Dakota
************************
Authorship and profile at Google
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization and is often used to measure the value of some businesses. It can also be used in the comparison of similar companies.
Generally, EBITDA makes it easier to evaluate various companies and to compare them against industry averages by removing the non-core and irregular operating costs, such as interest, which can vary depending on the management’s choice of financing, taxes which can fluctuate depending on acquisitions or losses from prior years, and arbitrary factors of depreciation and amortization.
The EBITDA formula can be used as a guideline when valuing larger companies, or when comparing the profitability of large similar companies in the same industry.
For the effective use of EBITDA, these larger companies should possess significant assets, have heavy amortization schedules, or bear substantial amounts of debt. Considering independent pharmacies in
Calculating EBITDA is done by:
1. Determining net income by obtaining total income and subtract total expenses.
2. Calculating the total amount of taxes paid to federal, state, and local governments.
3. Establishing interest fees paid to companies or individuals for the use of credit, or capital.
4. Determining the cost of depreciation (the expense recorded to allocate a tangible asset's cost over its useful life).
5. Calculating the cost of amortization (the expense for consumption of the value of intangible assets, such as goodwill, patents, and copyrights, over a specific period of time, or the asset's expected life.
6. Add #1 through #5 together to determine the EBITDA.
EBITDA calculation example:
1. Total Income 1,820
2. + Total Taxes paid 472
3. + Interest Fees 266
4. + Depreciation Costs 133
5. + Amortization Costs 66
6. = EBITDA 2,757
There are drawbacks of EBITDA that should be taken into account. EBITDA can be misleading number when it is confused with cash flow, and they an make even completely unprofitable firms appear to be financially healthy. The numbers are easy to manipulate and they are not factual when valuing small companies. With EBITDA, it is easy to overlook cash requirements for growth in accounts receivable, as well as miss cash requirements for growth in inventories. EBITDA is also not effective for companies with few assets, small amounts of debt, or low depreciation or amortization schedules.
EBITDA was being used during the 80's as a means of determining approximate cash flow in leveraged buyouts in order to determine whether companies could service their debt. By factoring out taxes, interest, amortization, and depreciation, this formula can allow an unprofitable business to appear financially healthy. This method of valuation was used extensively during the dotcom era to value unprofitable businesses, with few assets, little earnings, and the results from that method caused many to go bust. This was a blaring example of misapplying EBITDA.
Knowledgeable SD pharmacy specialists performing pharmacy business valuations will use EBITDA in pharmacy valuations, but only as part of a larger formula when computing values for specialty
The EBITDA number for a specific existing pharmacy is important, for the most part, when the existing ownership is establishing their drug store's value for the purpose of a line of credit, borrowing, creating a Trust, stock values, etc., but EBITDA does not have the same importance when selling a
Buyers may not have the same tax base, interest expense, or the same depreciation schedule, thus it is important that the buyer calculate an estimated EBITDA that is specific to their operating model, business systems, buying power, cost of operations, etc., not the sellers. It should also be noted that EBITDA assumes that the buyer will acquire all of the assets, working capital, accounts receivable, and liabilities. Those assumptions do not hold true regarding an acquisition of a pharmacy in
************************
