“How to calcualte EBITDA with examples?”

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Author: Sarthak Bhalerao

Table of Contents

  1. What is EBITA?
  2. Importance of EBITA
  3. How to calculate EBITA
  4. Example

What is EBITA?

EBITA  is a measure of company profitability, and it stands for Earnings Before Interest, Taxes, and Amortization. It is helpful for comparison of one company to another in the same line of business. In some cases, it can also provide a more accurate view of the company’s actual performance. Investors use EBITA as an indicator to measure the efficiency of certain companies and compare them with other similar companies. EBITA includes the cost of capital assets (depreciation) but excludes the financing costs as well as amortization of any intangible assets. As a result, it can measure the performance of companies more accurately.

Importance of EBITA

Income and expenses from investments, taxes, loan interests, and various types of depreciation determine the net profit of a company. The net income of the company reflects the overall profitability of a company, whereas EBITA reflects the operating profitability. The true performance of a company can only be determined after taxes, interest, and amortization are removed. Since the effect of such items is excluded in EBITA, investors consider it an important measure to determine a company’s true earnings. EBITA value can be either positive or negative. A positive EBITA value indicates the efficiency of the operation of a company, showing the cash flow amount available with the company to pay dividends or reinvest in business growth. A negative EBIT is not acceptable as it indicates that the company may be facing troubles in managing the cash flows or making profits.

How to Calculate EBITA

There are two methods in which one can calculate the EBITA. 

  • Direct Method:

In this method, the cost of goods sold (COGS) and operating expenses less amortization are subtracted from the company’s total revenue. 

EBITA = Total Revenue – COGS – (Operating Expenses – Amortization)

  • Indirect Method:

In this method, the interest, taxes, and amortization are added back to the net income, giving the EBITA value.

EBITA = Net income + Interest + Taxes + Amortization

Companies may not provide a breakdown of operating expenses of the cost of goods sold. In such scenarios, the indirect method can be used to calculate the company’s EBITA.

Example

Let’s take a look at the income statement of Company ABC for 2018 and 2019:

In 2018, the company had total revenue of $1,500,000 and a net income of $1,394,000. In 2019, total revenue increased to $1,700,000 and the net income fell to $1,359,000. Higher sales with smaller profits can be explained using EBITA. When the company’s net income is adjusted for taxes, interest, and amortization expenses, the profit instead increases. 

EBITA for 2018 = $1,394,000 + $6,000 + $35,000 + $0 = $1,435,000

EBITA for 2019 = $1,359,000 + $6,000 + $90,000 + $105,000 = $1,560,000

The above calculation shows that even though the company’s net income decreased by $35,000, the earnings before interest taxes and amortization for the company increased by $125,000 in 2019.

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Sarthak Bhalerao

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