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Assessing profitability: shortfalls of traditional measures.(Selected Topic)(Earnings Before Interest Taxes and Depreciation)

Business Credit

| June 01, 2004 | Calabrese, John; Rafferty, Brigid A. | COPYRIGHT 2004 National Association of Credit Management. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan.  All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)Copyright

Earnings Before Interest Taxes and Depreciation. Sounds simple, right? Tiffs is not always the case. Lenders, investors, management and other interested parties use EBITDA as one of the key measures of financial health. But how reliable is it?

EBITDA is used as the foundation for times earnings-based business valuation methodologies, financial covenants and determining debt service capability among other things. This can motivate businesses to attempt to represent EBITDA in the most positive light. The temptation to do so is greater still when a business is in trouble. Whether used as a yardstick of profitability and ongoing business value or a basis for ...

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