EBITDA Quiz

By: Staff
Image: refer to hsw

About This Quiz

As if Wall Street investing wasn't confusing enough, companies fill their earnings reports with conflicting metrics and lots of baffling acronyms. Test your knowledge of EBITDA, a controversial measurement of a company's financial health.

What does EBITDA stand for?

If you guessed it was expenses before investments, taxes, depreciation and amortization, then you're off to a good start. If not, well … good luck!

What is the standard accounting term for profit?

Net income represents profit; gross income and revenue are earnings before expenses are deducted.

What is the standard equation for calculating net income?

To calculate true profit, you need to consider all business expenses.

Which of the following is NOT a good example of a business expense?

The only way your rent could be a business expense is if you rent an apartment in another city as part of a business assignment.

Which of the following business expenses is considered a "non-cash" charge?

Since depreciation and amortization spread the initial cash charge of an expense over a number of years, the recurring expense is a paper expense and doesn't require the company to actually spend more money.

What is the main advantage of using EBITDA to measure a company's financial health?

Since not all companies have the same tax and debt structure, EBITDA allows for a clearer "apples to apples" comparison.

What does the acronym OIBDA stand for?

OIBDA (operating income before depreciation and amortization) is another way to calculate a company's earning capability.

What is the main difference between EBITDA and OIBDA?

Some investors prefer OIBDA because it really zeros in on operating income.

What was the first industry to popularize the use of EBITDA in earnings reports in the 1980s?

Companies executing leveraged buyouts used EBITDA numbers to show that the purchased company could generate enough capital to cover its debts.

EBITDA is an accurate measurement of which of the following?

EBITDA doesn't concern itself with cash at all, just the earnings and expenses on the books.

What is the main difference between cash flow and earnings?

The benefit of a statement of cash flows is that it gives an accurate portrayal of how much cash a company has on hand to cover its ongoing expenses.

True or false: EBITDA is an excellent substitute for cash flow.

EBITDA and cash flow measure two very different ways of calculating a company's financial health.

EBITDA is calculating using what general accounting method?

In accrual accounting, transactions are calculated as soon as they are in the books, even before cash changes hands

What does the acronym GAAP stand for?

These are principles established by the industry to ensure clear and straightforward financial reporting.

Is EBITDA considered a GAAP or non-GAAP calculation?

Non-GAAP calculations may not stand up to close scrutiny, but they are not illegal

Which two expenses excluded by EBITDA directly impact the cash flow of a company?

Creditors and Uncle Sam must receive their cash payments before any investor will see a dime.

Which of the following is the name of a common technique for inflating short-term earnings?

Stuffing the pipe means flooding the distribution channels by pushing excess inventory on suppliers and recording them as sales, even if much of the product will be returned.

What is the danger of ignoring depreciation expenses by using EBITDA?

This is another reason why EBITDA is very different from cash flow. Young companies may have invested heavily in equipment, so depreciation should be noted.

EBITDA is a useful measurement for which of the following?

An "apples to apples" comparison is the best use of EBITDA.

Does EBITDA have a bad or good reputation with most analysts and investors?

Too many failed companies have used EBITDA to cover lackluster earnings and fool investors.

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