Top 10 Questions of Value: 10. What is the Difference between EBITDA and Seller’s Discretionary Earnings and Why are they Important in Financial Analysis?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA earnings are used by many valuation professionals and financial analysts as a method to compare the cash earnings of a subject company with cash earnings of comparable companies. This method of earnings comparison is useful because it equalizes differences between or among companies in their capital structures, their depreciation methods and tax rates. This “equalization” allows the analyst to make informed judgments about earning capabilities of each company.

 

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