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Why EBITDA is used and why four items interest tax depreciation and amortisation excluded.

Why EBITDA is used and why four items interest tax depreciation and amortisation excluded.
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EBITDA stands for Earnings before Interest, Tax, Depreciation and Amortization. It is a tool used to analyze the operational efficiency and overall profitability from day to day activities. It is an effective tool in this regard because of the fact that these four items are excluded: Interest, Tax, Depreciation, and Amortization. This is becuase they are either non-cash expenses, non-operating expenses or expenses that the company's management have discretion over. Therefore, the management has little or no way of falsifying EBITDA.

The management can influence interest expense by choosing the capital structure appropriately.

They can also control tax expenses of the company to some expenses.

They also decide upon accounting policies regarding depreciation and amortization.

That is why EBITDA is used and why these four items are excluded from it.

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