Page 80 - Finance for Non-Financial Managers

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The Income Statement: The Flow of Progress
EBITDA—He Bit Who?
Nowhere to be seen on Wonder Widget’s income statement is
the term seen so often on reports issued by a growing number 61
of companies in recent years, earnings before interest, taxes,
depreciation, and amortization. Folks who fancy buzzwords will
appreciate the buzzword for this one—EBITDA, pronounced
“ee-bit-dah.” Duh.
EBITDA is a modified way of presenting operating income
for organizations that are not concerned about the financially ori-
ented charges that it excludes. Consider a profit center within a
company—perhaps a division whose job is simply to produce
operating income. The division general manager is relieved of
concern for corporate office decisions about how to finance the
business (remove interest expense), how long to depreciate its
assets (remove deprecia-
tion and amortization
Earnings before inter-
expense), and how to pay est, taxes, depreciation,
or defer its taxes (remove and amortization
income taxes). The result- (EBITDA) A financial measure for
ing calculation is closer to evaluating a company often used as an
a pure operating income at approximation of operating cash flow.
Also sometimes known as operating
the unit level, probably
profit before depreciation.
where this measurement
got its initial support.
Later on, of course, it began appearing on published income
statements of companies with heavy investments in equipment
and heavy debt loads, as a way to show their earnings without
the burden of these financial charges. Its relevance will be
judged over time, but for our purposes, just think of it as a dif-
ferent version of operating income.
But let’s get back to what our income statement actually
shows.

Other Income and Expenses—Not Just Odds and Ends
Finally, there are the nonoperating items, such as interest