How do Other Revenues and Expenses/Gains and Losses Affect EBIT and EBITDA
I understand that EBITDA= net income + taxes + interest expense + depreciation + amortization. It acts as a proxy for operating cash flow and is independent of capital structure and accounting decisions like depreciation from CapEx. EBIT= net income + taxes + interest expense and is basically operating profit or income from operations. Feel free to correct me if these formulas and ideas are wrong.
Given that these formulas are accurate, I am confused how other revenues and gains and other expenses are losses are treated. Are those included in EBITDA and EBIT then? In most multi-step income statements, it's mostly assumed that there's D&A, SG&A, and then interest expense. However, what if you have a gain on bond redemption, unrealized gain on trading securities, interest revenue or gain on disposal of plant asset? Assume similar ideas for the other expenses and losses section excluding interest expense. Based on the pure formulas for EBITDA and EBIT, wouldn't other revenues and other expenses(excluding interest) have to be included?
If they are, doesn't that basically undermine the point of these metrics? Because if EBITDA is supposed to be a measure of operating cash flow, including other revenues and other expenses(excluding interest) would skew the true operating aspect. Same idea for EBIT. My issue is even though it says before ITDA in case of EBITDA and before IT in the case of EBIT, are we supposed to just be excluding those particular metrics from calculations? Or we ignore anything based on the sequence of the income statement? So EBITDA is looking for just operating cash flow for example and we would ignore any places on the income statement that go beyond the operating section?
Thanks for the help!
Yes, you're right. Most often, EBITDA is used as an approximation for the free cash flow generation of a business as a going concern. By that logic, non-recurring income and expenses should be adjusted out of EBITDA whether they relate to business operations or not. Some non-operating income and expenses are recurring e.g. rental income, dividends from associate companies etc--these should be included if you're valuing the company and all its assets and not just the core operating business. In actual transactions, EBITDA adjustments are almost always heavily negotiated.
Thanks for your response! So basically for EBITDA and EBIT you should stick within the operating section of the income statement and avoid the indirect formula based off net income since that might be including non-operating income and significant gains and losses?
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