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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earnings Before Interest, Taxes, Depreciation, Amortization and Exceptional Items (EBITDAE)

What it is:

Earnings before interest, taxes, depreciation, amortization and exceptional items (EBITDAE) are a measure of a company's operating performance.

How it works (Example):

The formula for EBITDAE is:

EBITDAE = EBIT + Depreciation + Amortization + Exceptional Items

Essentially, the EBITDAE provides a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, unusual events, or tax environments.

EBITDAE can easily be derived from the company’s income statement and balance sheet.

Let's take a look at a hypothetical income statement for Company XYZ:

We have all the ingredients except for the exceptional items which must be disclosed on the company's balance sheet. Exceptional items are different from "extraordinary items;" extraordinary items are disclosed in the notes to financial statements.

Assume we find $10,000 listed as an exceptional item on the balance sheet. Using the formula above, Company XYZ's EBITDAE is:

EBITDAE = $750,000 + $50,000 + 10,000 = $810,000

Why it Matters:

EBITDA is one of the operating measures most used by analysts, but EBITDAE is far less popular. EBITDAE does include the direct effects of financing decisions, which makes it easier to compare different companies' operating performance. EBITDAE also removes the effects of unusual events (i.e. exceptional items) that are not normal characteristics of the company.

As a result, EBITDAE allows analysts to focus on the outcome of operating decisions while excluding most of the impacts of non-operating decisions. Such analysis is particularly important when comparing similar companies across a single industry.

EBITDAE, like EBITDA, can also be deceptive when applied incorrectly. It is especially unsuitable for firms saddled with high debt loads or those that must frequently upgrade costly equipment. Furthermore, EBITDAE can be trumpeted by companies with low net income in an effort to "window-dress" their profitability. EBITDAE will almost always be higher than reported net income.

Also, because EBITDAE isn't regulated by GAAP, investors are at the discretion of the company to decide what is, and is not, included in the calculation from one period to the next. Therefore, when analyzing a firm's EBITDAE, it is best to do so in conjunction with other factors such as capital expenditures, changes in working capital requirements, debt payments, and, of course, exceptional items.

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