Before understanding the concept of EBITDA a little carefully, you have to first understand very well what other income is so you can get definite and accurate information about the particular concept.
What is Other Income?
Well, what we can say about other income is that such an income of the company is not being generated in its core business but is being generated from some other operations.
To understand this concept let’s take an example of a car selling company. The main revenue generation source which is actually taxable for the ar company is obviously the producing and selling of the cars to the customers.
But suppose that the car selling company also provides the facility of finance for its customers while buying their particular then the company is obviously going to get an interest on that particular financial services and we can conclude that the income-generating from the interest actually becomes the other income for that particular company.
Let's assume that Company A has some other business model and it is generating its main revenue from that prime business model. Suppose Company A invests the surplus lying with it in some other company and also earns a good amount of returns from there, then we can say that the return received by that company on its prime investment must be treated as the other income source of that particular company's investment profile.
Should Other Income Include in EBITDA?
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a very important measure among Wall Street analysts. It can be calculated as Revenue – COGS – Operating Expenses + Other Income.
Whether or not to include other income in EBITDA, this concept has been very controversial from the beginning and different experts have different views on this particular topic.
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Many experts believe that other income should be included in EBITDA and many others also believe that other income has nothing to do with EBITDA.
The one class of financial experts believe that even if a company is earning money from activities other than its core business model, it must be represented in the column above EBITDA in the balance sheet and it is necessary to mention other income in the EBITDA.
Taking the car example, we can maybe assume that the financing activities, although not core to revenue, are essential enough to the overall profitability to be considered as part of EBITDA.
The one class of the financial people also believe that It should not be counted as part of EBITDA. Other income should be listed below our EBITDA total if a company generates other income that is not included in EBITDA.
The argument is that, while it contributes to the company’s profitability, it is not essential for the operations to be included in the company’s core profitability.
What does Industry Expert say About It?
When our team was conducting extensive research for this post, they discovered that other income should only be included in EBITDA if the income from sources other than the company is consistent. If the company’s other income isn’t consistent, it’s pointless to include it in EBITDA.
It’s also crucial to think about the goal of your investigation. For example, if you’re trying to buy the entire company and that company will continue to generate that other income even after the acquisition, that income should probably be included in EBITDA.
Alternatively, that additional revenue may cease to exist following the acquisition, in which case it should not be included in EBITDA.
If you’re comparing one company’s EBITDA to another’s EBITDA, you can only compare the other income if both companies produce the same amount of other income.
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If one firm generates other income while the other company is unable to create other income, there is no need to include other income in the EBITDA calculation.
Different banks and companies may have differing opinions on whether or not other income should be included in EBITDA. Even within the same company, different industry groups have diverse different perspectives.
As a skilled analyst, you should develop and keep to something like a single consistent and defensible point of view.
Final Conclusion on Should Other Income Include in EBITDA
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