What Is Amortization and How Does It Impact EBITDA?

Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It is often used in conjunction with loans, leases, and other forms of financing to spread the cost of the asset over the life of the agreement.

Example

Suppose a company takes out a loan to purchase a patent for a new technology. The cost of the patent is $100,000, and the loan has a term of 10 years. In this case, the company would amortize the cost of the patent over the 10-year period, resulting in annual amortization expenses of $10,000.

EBITDA

EBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's profitability that is calculated by adding back certain non-cash expenses to the company's net income.

For example, if a company has net income of $100,000 and annual amortization expenses of $10,000, the company's EBITDA would be $110,000 (100,000 + 10,000). By adding back these non-cash expenses, EBITDA provides a more accurate picture of the company's underlying profitability.

Conclusion

In summary, amortization is a method of spreading the cost of an intangible asset over a period of time, and EBITDA is a measure of a company's profitability that takes into account non-cash expenses such as amortization. Together, these concepts can provide a more accurate picture of a company's financial health and performance.