EBITDA – Earning Before Interest, Taxes, Depreciation and Amortization

EBITDA

In this article, we are going to talk about the matrics which help you to evaluate a company. The metrics are EBITDA. It is nothing but earnings before interest, taxes, depreciation, and amortization.

Here earning is nothing but the net profit of the company that total income – total expenses give you the net profit.

EBITDA Formula

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization

Net Profit = Total Income – Total Expenses

Total Income is income from the sale of products and services produced by the company is included along with income from other sources of the company.

Total Expenses include fixed and variable cost associated with producing those products and services along with interest towards loan taken by the company along with applicable taxes, depreciation, and amortization.

Here Depreciation is nothing but production and value of the tangible asset of the company with time and Amortization is nothing but deduction in the value of intangible assets of the company in time.

When you deduct all possible expenses from income of a company except taxes you get profit before tax. Now a company tries to deduct all possible expenses from its income so as to reduce its tax liability. When you deduct taxes from the profit before tax figure you get the net profit of a company.

So EBITDA can be calculated by adding back interest, taxes, depreciation, and amortization to net profit. So here you can see that EBITDA is trying to eliminate the impact of the certain items. These items depend on the financing and accounting decisions made by the company.

Interest outgo would depend upon the amount borrowed by the company toward interest rate etc. Taxes would depend on the geographical location of the company. Depreciation and Amortization would depend on the historical decision made by the company and not on the current operating performance.

So here EBITDA is trying to eliminate the impact of these factors on your profits and helps you major a company profitability from its business operations.

Also read: EPS: What is Earning Per Share and How to Analyze it?

Benefits of EBITDA

  • It would also help you judge how good a company is to settle its debts.
  • EBITDA is usually used to compare with the enterprise value. Enterprise value is nothing but the price to be paid to acquire a company. So when you compare EV to EBITDA whether it is the fair price to own that business.
  • It is useful when you comparing two companies within the same industries.
  • It is helpful in evaluating capital-intensive businesses like manufacturing, telecom etc.

Example of EBITDA

Let’s take a quick example to understand that how it is calculated? In the below table you will see the income statement of TVS motors for the financial year 2016-2017.

Total Revenue

Revenue From Operations [Gross]13,063.82
Less: Excise/Sevice Tax /Other Levies1054.75
Revenue From Operations[Net]12,009.07
Other Operating Revenues126.24
Total Operating Revenues12,135.31
Other Income173.37
Total Revenue12,308.68

Total Expenses

Revenue From Operations [Gross]13,063.82
Less: Excise/Sevice Tax /Other Levies1054.75
Revenue From Operations[Net]12,009.07
Other Operating Revenues126.24
Total Operating Revenues12,135.31
Other Income173.37
Total Revenue12,308.68

Tax Expenses – Continued Operations

Profit/Loss Before Tax698.68
Current Tax159.78
Less: MAT Credit Entitlement0.00
Deferred Tax-19.18
Tax for Earlier Years0.00
Total Tax Expenses140.60
Profit/Loss for The Period558.08

When you deduct total expenses, please note that the taxes have not been included in the expenses table. So when you deduct total expenses and taxes from the total revenue you get the net profit of the company. When you add interest, taxes, depreciation, and amortization to the net profit of the company, you get EBITDA.

EBITDA = 48.95 + 140.6 + 287.81 + 558.08 = 1030.44 Cr.

Also read: Earnings Before Interest & Tax (EBIT)

 

 

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