we’re going to be talking about a bit duh some people call this EBITDA I’m just going to refer to it as well as a bit duh now what is it exactly you can see that often on balance sheets on income statements and we’re going to try to enlighten some of you guys here or at least to give you a little bit of an idea on what it is exactly and how it can be used so let’s say we have in the middle here our company let’s pretend this is a bakery and we bake cupcakes alright so there’s money going in from our operations but there’s also expenses or there’s also things we have to take care of once we once we do get paid in order to get to our final net earnings right so we have interests we have taxes we have depreciation and there’s also amortization all right but at the end of the day there is a balance from what goes in and what goes out but we’re left with earnings.
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once we’re done paying all of these things there are earnings at the end of the day so what we’re going to want to do is use a bit de to try and compare ourselves to our competition let’s say in order to find out who is the best in order to who has the best capability to generate income all right to generate income that is based on their operations exactly so how much money did I make from selling muffins how much money did I generate only from selling the sorry the cupcakes let’s say all right so
what we’re going to do is we’re going to start from the right and we’re gonna take the earnings and we’re going to backtrack okay we’re going to be adding things that are in the red here in order to backtrack and get back on the left side of the equation in order to estimate how much our operations actually can generate income okay so we’re going to get earnings and we’re going to want to add interests and taxes so that’s earnings before interest and taxes that is called EBIT all right and once we add as well depreciation and amortization that is known as a DA so earnings before interest tax is depreciation and amortization so that is what EBITDA means
now why is it important and why is it an important comparator of the capacity to generate operational income well think about it this way if I take out a loan to buy my my building in which I’m going to set up my shop and sell cupcakes then I have to take out a loan and that loan I have to pay in amortization on it I have to you know I have to get rid of it eventually over time so I’ve taken out a loan let’s say 10 years ago and I’m doing payments on it I’m mortising on my loan and is that really taking anything out of my value or is that really a good reflection of what I’m capable of doing in terms of income generation from my operations not really okay it’s totally independent totally unrelated
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