The Economist's Glossary
Hi There!!!!!!!
Ever wondered how this world evolved – the trees, plants, animals and we human beings?
Well, don’t be scared I am not going to discuss anything like that ;-)) but what I am going to delve into is – what I call – The Economist’s Glossary!!!!!!
More than anything, the most difficult “readings” in this world, I found, are those involving medical and economic terms. I will leave “medicology” (my own invention-so don’t use this term officially) for later and discuss the word EBITDA (?? :-0 ??)
EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization. As the name suffests, it is the earning excluding expenses from depreciation, interest, taxes and amortization.
Let us now see what each term in the acronym means:
Depreciation is the decrease in the valus of the physical asset, which is caused by deterioration, or wear and tear of equipment, and obsolence. Let us assume that the value of asset at the time of investment (I) is C. After 1 year, the cost is C1 and the depreciation D will be calculates by the equation
Ø C1 = C + I - D
Amortization is a term that refers to the gradual paying off of a debt in regular installments over a period of time. "Amortization" arises from a Latin term that means "to deaden," and a dictionary definition includes the phrase "gradual extinguishment." Hmmm…why? Well because, a part of the payment goes toward the interest cost and the remainder of the payment goes toward the principal amount -- the amount borrowed. Interest is computed on the amount owed "and thus will become progressively smaller as the ending balance of the loan reduces."
Now that’s getting interesting – let’s take an example to understand the real meaning of amortization.
Ø Take a mortgage loan for $100,000 at 6.5 percent for 30 years. The monthly principal and interest payment is $632.07. For the first month, you owe interest for $100,000, which equals $541.67. The remainder of the payment -- $90.40 -- goes toward principal. In other words, your debt is reduced $90.40.
Ø "Next month, you only owe interest on $99,909.60, so $541.18 goes to interest and $90.89 goes to principal," Edwards says. "Month after month, your interest portion will decrease a bit and your principal reduction will increase. This process continues until your 360th payment contributes $3.41 to interest and $628.66 to principal."
Ø If the loan above amortized for 15 years instead of 30 years, the monthly principal and interest would cost $871.11. In the first month you still would pay $541.67 in interest because the amount of the loan is the same and the interest rate is the same. But you would pay $329.44 in principal with that first payment because you're paying off the loan quicker.
Interest is a surcharge on the repayment of debt (borrowed money). Fraction by which the balances grow is called the interest rate. The original balance is called the principal.
Tax is an involuntary fee paid by individuals or businesses to a government. Taxes are most often levied as a percentage, called the tax rate, of a certain value, the tax base (how much ncome
and assets one has, earns, spends, inherits, etcetera).
Well, one should not think that EBITDA is a better idea of how profitable the company really is. This is a debatable topic as there are different views from different investors.
Oops, it’s time to go and eat something……feeling HBEML (Hunger Before Eating My Lunch) ;-))
Ever wondered how this world evolved – the trees, plants, animals and we human beings?
Well, don’t be scared I am not going to discuss anything like that ;-)) but what I am going to delve into is – what I call – The Economist’s Glossary!!!!!!
More than anything, the most difficult “readings” in this world, I found, are those involving medical and economic terms. I will leave “medicology” (my own invention-so don’t use this term officially) for later and discuss the word EBITDA (?? :-0 ??)
EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization. As the name suffests, it is the earning excluding expenses from depreciation, interest, taxes and amortization.
Let us now see what each term in the acronym means:
Depreciation is the decrease in the valus of the physical asset, which is caused by deterioration, or wear and tear of equipment, and obsolence. Let us assume that the value of asset at the time of investment (I) is C. After 1 year, the cost is C1 and the depreciation D will be calculates by the equation
Ø C1 = C + I - D
Amortization is a term that refers to the gradual paying off of a debt in regular installments over a period of time. "Amortization" arises from a Latin term that means "to deaden," and a dictionary definition includes the phrase "gradual extinguishment." Hmmm…why? Well because, a part of the payment goes toward the interest cost and the remainder of the payment goes toward the principal amount -- the amount borrowed. Interest is computed on the amount owed "and thus will become progressively smaller as the ending balance of the loan reduces."
Now that’s getting interesting – let’s take an example to understand the real meaning of amortization.
Ø Take a mortgage loan for $100,000 at 6.5 percent for 30 years. The monthly principal and interest payment is $632.07. For the first month, you owe interest for $100,000, which equals $541.67. The remainder of the payment -- $90.40 -- goes toward principal. In other words, your debt is reduced $90.40.
Ø "Next month, you only owe interest on $99,909.60, so $541.18 goes to interest and $90.89 goes to principal," Edwards says. "Month after month, your interest portion will decrease a bit and your principal reduction will increase. This process continues until your 360th payment contributes $3.41 to interest and $628.66 to principal."
Ø If the loan above amortized for 15 years instead of 30 years, the monthly principal and interest would cost $871.11. In the first month you still would pay $541.67 in interest because the amount of the loan is the same and the interest rate is the same. But you would pay $329.44 in principal with that first payment because you're paying off the loan quicker.
Interest is a surcharge on the repayment of debt (borrowed money). Fraction by which the balances grow is called the interest rate. The original balance is called the principal.
Tax is an involuntary fee paid by individuals or businesses to a government. Taxes are most often levied as a percentage, called the tax rate, of a certain value, the tax base (how much ncome
and assets one has, earns, spends, inherits, etcetera).
Well, one should not think that EBITDA is a better idea of how profitable the company really is. This is a debatable topic as there are different views from different investors.
Oops, it’s time to go and eat something……feeling HBEML (Hunger Before Eating My Lunch) ;-))
posted by Rajal at 11:56 AM
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