Question

in 250 words or more, If you could only look at one item on the income statement, which would it be and why?

Answer 1

If I could only look at one item in a company’s income statement then that would be EBITDA i.e. earnings before interest, taxes, depreciation and amortization. This is because EBITDA is one of the most important indicators of a company’s financial performance. In fact EBITDA is used as a proxy for the earning potential of a company.

In essence, EBITDA is net income but with interest, taxes, depreciation and amortization added back to it. EBITDA is a useful financial metric is often used to compare profitability among companies in a given industry. Besides comparing profitability EBITDA is also used in valuation ratios to determine the value of a company. A key valuation ration in which EBITDA is used is: EV/EBITDA. In this ratio EV stands for enterprise value and the ratio EV/EBITDA is a very useful valuation ratio that is based on EBITDA.

EBITDA is highly useful for the above mentioned purposes as it eliminates the impact and the effects of decisions related to financing as well as related to accounting. This is the reason why the EBITDA line item is such an important earning gauge, measure and indicator. What EBITDA is able to do is that it eliminates the vagaries between financing and accounting decisions. Such vagaries can vary significantly from one company to another and when they are eliminated then investors and other stakeholders can make comparisons between different companies on a more accurate basis.

Thus, on the basis of above mentioned reasons, the one item that I would look at on a company’s income statement is its EBITDA.

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