Question

What are the advantages and disadvantages of using measures such as operating income before depreciation (OIBD) or earnings before interest, taxes, depreciation, and amortization (EBITDA) rather than net income in comparing profitability across foreign companies? Also, how can more disclosure in the notes to the financial statements facilitate the analysis of foreign financial statements? I need 300 word answer

Answer 1

1. What are the advantages and disadvantages of using measures such as operating income before depreciation (OIBD) or earnings before interest, taxes, depreciation, and amortization (EBITDA) rather than net income in comparing profitability across foreign companies?

Answer: The advantage of using a measure such as EBITDA to compare profitability of companies across countries is that differences in accounting for interest, taxes, depreciation and amortization across countries do not affect the profitability measure. The disadvantage is that these expenses might be important in evaluating profitability and in determining the value of the firm.

Advantages- If the analysis is based operating income before depreciation (OIBD), it removes the effect of interest, depreciation and income taxes from the relevant measure of earnings. Same also goes with earnings before interest, taxes, depreciation and amortization (EBITDA) which adds back amortization. Advantages of using measures such as OIBD and EBITDA rather than net income in comparing profitability across foreign companies is that differences in accounting as a result of interest, taxes, depreciation and amortization do not affect the profitability measure. Disadvantages- Each item removed may have implications in evaluating profitability and in determining the value of firm. This might create a big problem. Eventually only sales across firms are being compared.

2. how can more disclosure in the notes to the financial statements facilitate the analysis of foreign financial statements?

Answer: Disclosures in the notes to financial statements can provide additional details related to specific line items that allows the analyst to reformat the financial statements to format preferred by the analyst. Disclosure related to item such as provisions can allow analysts to assess the impact that these have on income.

1. Provide specific details to line items that allows the analyst to reformat the statements.

2. Disclosures related to provisions can allow the analyst to assess the impact on income.