Depreciation and EBITDA”

Depreciation and amortization are non-cash expenses related to assets that have already been purchased. They are subject to judgment and estimates, including how long the underlying asset will last and whether they get adjusted based on experience or new projections. An internet search will reveal articles and reports of businesses using depreciation to manipulate financial information. Executives and financial companies focus on EBITDA (earnings before interest, taxes, depreciation, and amortization) as one measure of the financial health of a business. EBITDA is often used as a loan covenant, with borrowing limits set as percentages of EBITDA.

Examine the importance of depreciation/amortization to presenting a fair evaluation of a company. Should more emphasis be placed on EBITDA than on financial reports presented according to GAAP? Does the use of EBITDA remove the chance of manipulating depreciation/amortization?

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