EBITDA: The Real Bottom Line

By Andrew Paparozzi
In February 11, 2010

EBITDA, or earnings before interest, taxes, depreciation, and amortization, rose to 5.7% of sales during the six months ending in September 2009 from 3.5% of sales during the six months ending in May for NAPL Performance Indicators participants. Over the same period, EBITDA rose to 9.1% from 5.4% of value added. (See the chart below.)

The turnaround isn’t surprising: As discussed in our previous post, Value Added/Sales RisingPerformance Indicators participants are leaders and companies determined to become leaders. And leaders come out of recession far earlier than the industry at large.

Why is EBITDA so important? Because it measures a company’s overall profitability, or “real bottom line.” EBITDA is net income adjusted for costs that do not relate to the actual value of the business. EBITDA is critical when assessing a company’s profitability because it gets at the core value of the business independent of factors such as debt, tax, or capital structures. It is calculated by adding interest expense and all depreciation/amortization back into net income before tax.

Because EBITDA adjusts for the costs that do not affect the actual value of the business, it allows for apples-to-apples comparisons across different companies, markets, and even industries. Like all financial figures, EBITDA provides the most insight into a company’s performance when paired with other figures, such as sales or value added—as in NAPL Performance Indicators.

What’s happening to your EBITDA/sales and EBITDA/value added ratios?

EBITDA-Sales, EBITDA-VA

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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