Question

Two companies have the same operational prospect but have a significant difference in their depreciation expense. Which of the following would be the most appropriate metric to compare the cash-operating performance of the two companies?

Answer 1

Answer:

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Answer 2

The most appropriate metric to compare the cash-operating performance of the two companies is Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

• Since the two companies have the same operational prospect but have a significant difference in their depreciation expense, therefore we would calculate using the process of EBITDA.
• EBITDA calculates earnings before depreciation therefore in this case we can compare the cash-operating performance of the two companies without considering the difference of their depreciations.
• Thus, it is a more appropriate and accurate use of corporate financial performance since it shows earnings before any such deductions, like interest, tax, depreciation, etc.