--- title: What is EBITDA and what is it used for? date: 2019-11-26T07:04:52Z modified: 2024-05-30T09:03:55Z permalink: &quot;https://grow.ee/ebitda/&quot; type: post status: publish excerpt: &quot;&quot; wpid: 5912 featured_image: &quot;https://grow.ee/wp-content/uploads/2019/11/EBITDA.jpg&quot; timestamp: 2024-05-30T09:03:55Z tags: - Accounting --- Every person who has come into contact with business or finance has probably heard of the abbreviation EBITDA. What exactly is it and how do you understand it? The abbreviation comes from the English expression Earnings Before Interest, Taxes, Depreciation, and Amortization. Simply put, it shows a company&#039;s ability to earn money, regardless of the company&#039;s obligations to creditors, depreciation and income tax expense. But what is it good for anyway and how should it be used? ## EBITDA is useful when comparing two similar companies EBITDA is useful when comparing companies with similar business activities but different capital structures, because it does not take into account the company&#039;s debt interest and other expenses. Two companies with similar profits may be financed differently: one with debt, the other with owners&#039; equity. It is clear that a company that pays interest on loans monthly or annually cannot be similar to a company without debt obligations, but EBITDA makes it possible to remove interest from the equation and compare the net profit of two companies. EBITDA is also useful for credit institutions to assess the actual interest payment ability of companies over a limited period of time, but not in the very long term - depreciation and other longer-term expenses can only be removed from a company&#039;s ability to earn money in the short term. For example, if a company has made a major investment in the past, this is also reflected in the annual expense reports, even though the actual money has already left the company. Thus, the previous investment does not affect the company&#039;s current cash flow, and using EBITDA, the credit company can assess whether the company is able to fulfill its loan obligations. ## You should always base your assessment on several different indicators When using EBITDA to assess cash flows, it should be taken into account that the financial situation is also significantly affected by trends in inventories, uncollected and unpaid invoices, and EBITDA does not take this into account at all. Grow Finance accountants recommend that both investors and people planning to buy a company should always base their assessment on several different financial indicators, because looking at only one number can never give a complete picture of the company. Using the EBITDA ratio can provide valuable information, but when using it, you should understand its strengths and weaknesses well, it is not an all-powerful indicator, and when using it, you should find at least one or two more parameters to monitor in parallel. Grow is constantly working to ensure that our accountants keep up with the times and we have also reflected on our blog the values that a good accounting service should be based on. We see ourselves as pioneers in our field and are the first[ 100% paperless accounting office](https://grow.ee/wp-content/uploads/wp-mfa-exports/page/ettevottest.md) in Estonia. If you also want to be part of the forward-looking[ online accounting service](https://grow.ee/services/raamatupidamine/) today, contact us via our website, send an e-mail to <info@grow.ee> või hoopis helista numbril 5629 3090!