Those in need of new business support who are interested in analysing and comparing profitability between companies and industries may do so via EBITDA, a measure of profits that eliminates the effects of financing and accounting decisions.

You will find in a company’s income statements its earnings, tax and interest figures, and in the notes, to operating profit or on the cash flow statement the depreciation and amortization figures. EBITDA can be calculated by first establishing the operating profit – also known as earnings before interest and tax (EBIT) – before adding back depreciation and amortization.

However, EBITDA as a non-GAAP measure allows greater discretion to be exercised with regard to what does or doesn’t figure in the calculation. It means that from one reporting period to another, some companies may alter the items included in their EBITDA calculation.

It was in the 1980s era of leveraged buyouts when EBITDA first became widely used, its purpose at that was to indicate a company’s ability to service debt. With the passage of time, it became increasingly popular in industries where there was a need for costly assets to be written down over a protracted time period. Many firms – tech organisations, in particular – now routinely quote EBITDA, even when there is no need for it.

EBITDA is often wrongly perceived as representing cash earnings. As sound a metric as EBITDA is for the evaluation of profitability, it is not a good indicator of cash flow. A potentially significant omission from EBITDA is the cash needed for the funding of working capital and the replacement of outdated equipment.

This led to EBITDA’s frequent use as an accounting gimmick to obscure the true extent and nature of a company’s earnings. That an organisation may be attempting to use EBITDA to hide something makes it crucial to consider this metric alongside other performance measures if one is to get a truly accurate picture.