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Methods and concepts for Value Based Management (VBM)


EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, came into wide use among private capital firms calculating what to pay for a business . The private capital firms that originally employed EBITDA as a useful valuation tool removed interest, taxes, depreciation, and amortization from their earnings calculations in order to replace them with their own presumably more precise numbers:

Later, many public companies, analysts and journalists have urged investors to also use EBITDA as a measure of the cash public companies generate . EB7I7TDA is often compared to cash flow because it rightfully adds back to net income two major expense categories that have no impact on cash: depreciation and amortization.
Financial Value Cash Flow Traditional Income Measure (Residual Income Component)
Yet EBITDA is a very poor and even misleading mechanism if it is used to approximate cash flows of public companies! Why?