EBITDA (Earnings Before Interest Tax Depreciation and Amortisation)
This is the short form to earnings before interest tax depreciation and amortisation. This works towards elimination of two of the non-cash expense. Depreciation is being considered as an option wherein, there is decrease in the value of the asset. On the other hand, amortization means decrease in the value of intangible assets. The investors not only look at the profits. They are also considering the cash being generated by the organization (Hartline, 2010). Cash generating ability of the organization is to be identified by way of adding back the profits being generated by it in the area of doing the tasks at a particular point of time in the area of doing the tasks.
Calculation of EBITDA
EBITDA of the organization is being calculated by way of adding depreciation and amortization back to the operating profit. The example of calculation of EBITDA is being provided below.
EBITDA = EBIT + Depreciation + Amortization
=$ 22m+$ 12m+NIL
So, EBITDA generated from the above example is $ 34m.
This is also being used by various countries which help them to have measurement of performance. The comparison of EBITDA of one company is being carried out with the other company for finding out whether the companies are being doing well in comparison to other or not.
This is the ratio of operational profit to net revenue being generated by the organization. It is being identified in percentage basis and then, comparison with other companies is being carried out by the organization.
Calculation of EBITDA Margin
Suppose we have an EBIT of $ 32m and Revenue is $ 40m, then we can calculate EBIT margin as:-
EBIT and EBITDA
The short names of both these provide information about the fact that, if one adds depreciation and amortization to EBITDA then, earnings before interest and tax are identified. Both these tools are crucial for the organizations wherein, there is a case of comparison of profitability of the organizations. EBITDA is also considered to be a substitute for the purpose of doing calculation of cash flows within an organization (Jones, 2009). The organization has to identify that whether it is within the position to pay its creditors or not. In this area, it is going to be identified that the organization is being working well towards making payment to creditors.
Importance of EBITDA
a. It provides a common platform for making comparison of different companies which are working in different industries.
b. It is also being used by various organizations for ensuring that, harmonization of revenue earned by the organization is being taken into consideration.
c. It does not include non-recurring expenses. This particular thing is going to help the organization to make sure that, it identifies clearly the profits being earned by it. This way, it is going to be helped in finding out actual financial position of the organization.
d. The organization has to identify EBITDA for finding out coverage ratio therefore; it is going to be essential for work towards finding EBITDA.
e. The financial durability of the organization is also being identified by the organization with the help of EBITDA.
Limitation of EBITDA
a. There are certain investors who do not consider EBITDA as an appropriate method of doing calculation of profit as this method does not include interest, and depreciation.
b. This also does not include the flow of working capital within the organization wherein, proper results would be generated by it in the area of doing the tasks being assigned.
Jones, C. (2009). Financial Analysis. Routledge.
Hartline, R. (2010). Analysis of Financial Statements. Cengage Learning.
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