interest revenue included in EBITDA

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Sims

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Suppose a company earns interest on its cash on hand, is it included in EBITDA?
 
no, unless maybe it’s some sort of financial company where earning interest is part of it’s operation.
 
Thats what I thought but then Investopedia and wikipedia have it wrong:
Investo: NI+interest expenses+dep+amort
Wiki: Operating rev-operating expenses + other rev
 
hold on:
interest earned on cash is part of the E so yes, it is included. and interest paid is not in EBITDA (Earnings before INTEREST, taxes, depr, amortization)
 
I was debating this with my Analyst the other, because one of the companies we follow includes earned interest on cash-on-hand in their EBITDA calculations. In the end, we took it out.
MFE: We consider Earnings only as operation earnings.
 
I agree with virginCFAhooker – don’t include it unless it is part of operations, like for financial institutions. You net the interest revenues against interest expenses to figure out EBITDA. EBITDA is supposed to give you a sense of earnings from the ongoing business activities, and you don’t include the interest revenues because laying on a new capital structure to the company would change income from interest (but, in comparison, it would not necessitate changing the underlying operations).
 
MFE, I’m not sure if you are technically right, but you are wrong to the spirit & purpose of Ebitda. EBITDA is meant to measure the cashflow from the operations, as if you were to acquire those operations, usually excess cash that is generating interest is more of a corporate possession, not something of the business. If the business is a financial business that has to keep cash around then I agree it should be part of EBITDA.
ps I didn’t read numi’s post when I posted this. he said it right, too, in a different way.
 
virginCFAhooker Wrote:
——————————————————-
> MFE, I’m not sure if you are technically right,
> but you are wrong to the spirit & purpose of
> Ebitda. EBITDA is meant to measure the cashflow
> from the operations, as if you were to acquire
> those operations, usually excess cash that is
> generating interest is more of a corporate
> possession, not something of the business. If the
> business is a financial business that has to keep
> cash around then I agree it should be part of
> EBITDA.
I would argue depends on the use. I use EBITDA to value relative cash generation for fixed income purposes. Thus i use Interest expense vs net interest.
 
You wouldn’t think it should be since EBITDA’s supposed to be a fair representation of a company’s operating income. But tell that to all the companies that include it in their definition of “EBITDA” per their credit agreements for covenant purposes.
 
virginCFAhooker Wrote:
——————————————————-
> MFE, I’m not sure if you are technically right,
> but you are wrong to the spirit & purpose of
> Ebitda. EBITDA is meant to measure the cashflow
> from the operations, as if you were to acquire
> those operations, usually excess cash that is
> generating interest is more of a corporate
> possession, not something of the business. If the
> business is a financial business that has to keep
> cash around then I agree it should be part of
> EBITDA.
>
> ps I didn’t read numi’s post when I posted this.
> he said it right, too, in a different way.
analytically you’re correct, but EBITDA is an accounting metric, you have to make those adjustments yourself.
Just like how youd adjust NI if you didn’t like a company’s revenue recognition policy.
 
Operating Profit (which includes depreciation) is an accounting metric that is on every income statement, but ebitda is rarely found on income statements and if it is there is a big asterik/disclaimer.
 
When I’m valuing equity, I use EBITDA yield on Enterprise Value. Since we exclude cash from enterprise value, I would exclude interest earned from EBITDA also for a more consistent analysis.
 
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