EBITDA and the Absence of Interest: Pros and Cons
- Graziano Stefanelli
- Sep 23, 2023
- 1 min read
Advantages of Excluding Interest
→ Focus on Operations
EBITDA allows a clear view of operational profitability, making it easier to compare companies across different sectors and regions
→ Standardization
EBITDA provides a standard measure to assess profitability across different units within a multi-unit or multi-product organization
→ Simplifies Analysis
By omitting interest, EBITDA simplifies the financial analysis for stakeholders, making it an accessible metric
Disadvantages of Excluding Interest
→ Incomplete Picture
Excluding interest can lead to the overvaluation of companies with significant debt, presenting a skewed financial health
→ Ignores Solvency Risks
High interest payments may pose a solvency risk… EBITDA won’t capture this, possibly creating a false sense of security
→ Not a Cash Flow Measure
EBITDA is often used as a proxy for cash flow but it falls short in accounting for changes in working capital and actual cash cost of interest
CHECK OUT OUR FREE GUIDES IN THE BOOKS PAGE!
