When the software purchase has been customized it can meet the guidelines in IFRS 16. Through a customized purchase agreement, an asset is recognized based on the NPV of the lease payments with a corresponding liability. Effectively the respective amortization and the interest expenses appear then below EBITDA. EBITDA sole focus is on earnings from operations and might tell investors how the company is really doing and whether it can service it's future debt from operations. For investors it is easier to compare the financial health of companies and deciding where to invest. Effects due to different capital structures, tax rates and depreciation policies are left out.
- clearer reflection of operations by stripping out expenses which might obscure true performance
- Interest, mostly reflects management's choice of financing, is ignored
- Taxes are left out as these can vary widely depending on acquisitions and losses in prior years
- removes the arbitrary and subjective judgments that can go into calculating depreciation and amortization, i.e. useful lives, residual values and various depreciation methods. By eliminating these items