Finance prompt

Explaining Financial Concepts

Provide clear explanations of complex financial concepts.

User Prompt

Explain the concept of in simple terms suitable for non-finance staff at . Include its importance and how it is calculated.

Sample AI Response

generated with GPT-4o-mini

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In simple terms, it’s a way to measure a company's overall financial performance and profitability from its core operations, without considering certain expenses that can vary widely between different companies.

Why is EBITDA Important?

  1. Focus on Core Operations: EBITDA helps us understand how well Nike is doing in its main business activities, like selling shoes and apparel, without getting distracted by other financial factors like taxes or interest payments.

  2. Comparison: It allows us to compare Nike’s performance with other companies in the same industry, regardless of their financing or tax situations. This is useful for investors and management to see how we stack up against competitors.

  3. Cash Flow Indicator: While it’s not a direct measure of cash flow, EBITDA gives a good indication of the cash generated from operations, which is important for funding growth, paying off debt, or returning value to shareholders.

How is EBITDA Calculated?

To calculate EBITDA, you start with the company’s net income (the profit after all expenses) and then add back the following:

  1. Interest: This is the cost of borrowing money. We add it back because it can vary based on how a company is financed.

  2. Taxes: These are the payments made to the government. We add them back to focus on operational performance.

  3. Depreciation: This is the reduction in value of physical assets (like equipment and buildings) over time. It’s a non-cash expense, so we add it back.

  4. Amortization: Similar to depreciation, but it applies to intangible assets (like patents or trademarks). We also add this back.

The Formula:

So, the formula looks like this:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Example:

If Nike has a net income of $1 billion, pays $200 million in interest, $300 million in taxes, has $150 million in depreciation, and $50 million in amortization, the EBITDA would be:

  • EBITDA = $1 billion + $200 million + $300 million + $150 million + $50 million
  • EBITDA = $1.7 billion

In summary, EBITDA is a useful tool for understanding how well Nike is performing in its core business, making it easier to compare with others and assess financial health.