Practice question · Multiple choice
Analysts often compare firms on EBITDA rather than net profit. What does stripping out interest, tax, depreciation and amortisation buy, and what does it hide?
Hints
- Two identical businesses, one funded by debt and one by equity. Which line item differs?
- Ask what depreciation represents in a capital-heavy business.
Show the answer
C. It compares across financing structures and hides capital cost
Why
Removing financing and tax makes two differently-funded firms comparable; removing depreciation pretends the machines last forever. Buffett's objection is exactly this, for a business that must constantly replace its assets, depreciation is a real cost and EBITDA flatters it.
Practise The Income Statement
The app has 5 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on The Income Statement
- Which items appear on the income statement (not the balance sheet)?
- Net profit flows into retained earnings on the balance sheet at period-end.
- Order the income-statement waterfall from top to bottom.
- A firm has revenue 2,000, COGS 1,200, OPEX 500, interest 100, and tax 50. Estimate the net margin (net profit…
- Revenue or expense? Sort each item.
- Match each profit line to what it measures.
- Two firms have identical EBIT of 200, but Firm A has interest expense 80 and Firm B has interest expense 10.…