As a business owner, you are constantly comparing business performance not only to competition but to previous year earnings and performance. In merger and acquisition transactions, EBITDA is often used by companies to compare similar businesses in the same market. Understanding how to use EBITDA can help your overall performance and make sure you are prepared in the event of a business sale or purchase.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) was first used as a general measure of cash from operations while stripping out factors such as interest, tax, depreciation and Amortization to allow analysts to compare companies on an Apples-to-Apples basis. It is important in assessing the performance of the firm over time compared to industry benchmarks. It is also a key valuation measure for developing the sale price or valuation of a business.