Question

Explain difference between EBITDA, Non GAAP Net Income & Cash-Flows from Operating Activities? Why they are important for management and investors?

Answer 1

1. EBITDA

EBITDA is the abbreviation for Earnings before interest, tax, depreciation and amortization. It includes the operating profit before deducting non cash expense of depreciation and amortization. Finance charges like interest and tax on income are excluded. It is calculated by deducting operating expenses from gross profit.

2. Non GAAP Net Income

Net income is calculating after deducting all operating expenses, interest and income tax. It gives the net income which is available to shareholders and carried over to Retained earnings.

3. Cash flow from operating activities

It is cash flow generated by core operating activities of the firm. It is calculated by adjusting noncash items like deprecation, gain and loss on sale of assets to net income. Changes in operating assets and liabilities are considered in arriving at cash flow from operating activities

Importance to management and investors:

EBITDA is important as it helps in comparing performance at operational level without considering finance charges and non cash expense. It is a measure often used in valuing companies. It helps in calculating Enterprise value.

Net Income helps in allocating dividend to preferred and common stockholders. It also helps in calculating earnings per share. Earnings per share helps in calculating price earnings ratio which is often used as a benchmark across the industry.

The net income reported in income statement is on accrual basis. It does not consider cash flow generated by the organisation. Hence cash flow statement is very important. Cash flow from operating activities helps in assessing performance of an organisation such as cash available for investment in fixed assets, free cash flows to creditors and shareholder. Cash flow helps in understanding liquidity of the firm and movement of cash during the year in operating assets and liabilities