It's the absolute first cut at the profits of a company, not including any interest charges (if there's debt) or asset charges (amortization & depreciation). It answers the question, does this company's basic business, the thing that produced revenue, make money above and beyond the basic cost of that revenue.
Revenues
- Cost of Goods Sold
= Gross Profit
- Selling Gen Admin
= EBITDA (Earnings before Interest, Tax, Depreciation, Amort)
- Depr + Amort
= EBIT
- Interest
= Pre Tax Income
- Tax
= Net Income
Because Mainframe depreciates all their production equipment in one year or less (even though they use it for 5+ years and most companies depreciate those assets over 3-5 years) it adjusts for extremely conservative accounting. They expense the equipment they buy to produce a new series over each episode. The reason is that they don't know if they'll have a second or third season. As they continue to grow, however, it will help their profitability immensely. Look at ReBoot season 3 under production now. They already have the equipment and production suites paid for from the first 2 seasons of ReBoot and for the first season of Beast Wars. Those shows essentially paid for all the assets of the company (minus whatever software upgrades they've developed or bought). Yet, they will still be getting the same (or higher) fee per episode. The result is that the net income should be much higher. Of course, this assumes that they do not lower their fees. Given that Beast Wars is #1 in 70% of the US markets, in Canada, being picked up around the world, and ReBoot is still highly ranked (#2 in Canada) even though they haven't had a new episode in over 9 months, I doubt they'll lower the fees.
Since they are still small and growing fast, they may need to have 10 more production suites over the next few years, I don't know. But, in any case, if they continue to grow, the conservative depreciation policy will offset some of the benefit. I would imagine with 15-25 suites, you could produce a hell of a lot of animation. But who knows, if they get 2 or 3 movies, they'll need plenty more equipment. Let's only hope that happens.
The point about accounting is that a company should always try to match revenues to the costs that have produced those revenues. All businesses uses assets over the course of a year and depreciation is an attempt to "charge" the company for the "usage" of that asset, or is "wastage". Given that Mainframe charges themselves for assets that will last and be used for 3-5 years in one year is extraordinarily conservative. It penalizes reported net income up front. Over time, net income should be that much greater.
Looking at EBITDA to compare values is useful because of Mainframe's depreciation policy. |
