Why is EBITDA often higher when machines are owned rather than leased?

Why is EBITDA often higher when machines are owned rather than leased?

• A. Leasing expenses are generally lower
• B. Depreciation does not reduce EBITDA
• C. Leasing increases operational flexibility
• D. Machines owned are less valuable than leased

Answer: (B)

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, excludes depreciation from its calculation. Therefore, when machines are owned, the depreciation expense associated with those machines does not affect EBITDA directly. Since depreciation is a non-cash expense that reduces net income but is not included in EBITDA, owning machines allows for more favorable EBITDA figures compared to leasing, where leasing payments are often recorded as operating expenses but do not add any depreciation. Leasing arrangements typically incur periodic lease expenses, which do reduce operating income directly but do not factor into EBITDA. This is why companies might see higher EBITDA when they own machines instead of leasing them; the owned assets do have associated depreciation, but it is not included in the EBITDA calculation, leading to a potentially higher figure compared to leased equipment where lease payments directly influence operating expenses.

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, excludes depreciation from its calculation. Therefore, when machines are owned, the depreciation expense associated with those machines does not affect EBITDA directly. Since depreciation is a non-cash expense that reduces net income but is not included in EBITDA, owning machines allows for more favorable EBITDA figures compared to leasing, where leasing payments are often recorded as operating expenses but do not add any depreciation.

Leasing arrangements typically incur periodic lease expenses, which do reduce operating income directly but do not factor into EBITDA. This is why companies might see higher EBITDA when they own machines instead of leasing them; the owned assets do have associated depreciation, but it is not included in the EBITDA calculation, leading to a potentially higher figure compared to leased equipment where lease payments directly influence operating expenses.