While looking at a company’s finances, you may have come across something called EBITDA. What is EBITDA, and why is it important? EBITDA is crucial as it gives you a good idea of a company’s performance after discounting financial, account, and tax issues. EBITDA is simply earnings before interest, tax, depreciation, and amortisation. The EBITDA margin is the ratio of EBITDA to revenue or EBIDTA divided by revenue. You can use an EBITDA calculator or EBIDTA margin calculator online to determine a company’s health.
EBITDA margin calculation is essential because it gives you a clearer picture of a company’s operating profitability and cash flow. It’s used a lot during mergers and acquisitions as it shows a clearer picture of performance across industries and sizes.
How to calculate EBITDA?
The easiest way is to use an EBITDA calculator online. It can also be done manually. If a company has revenues worth Rs 75 lakh, an operating profit of Rs 10 lakh, depreciation expenses of Rs 2 lakh, amortisation expense of Rs 1 lakh, and pays taxes worth Rs 1 lakh, the EBIDTA would be Rs 10 lakh minus (2+1+1), or Rs 6 lakh. Dividing EBIDTA by revenues would give you the EBIDTA margin, which in this case is 8 per cent.
The calculator needs you to enter revenue, tax, interest, depreciation and amortisation figures. An EBITDA calculator online is a convenient tool to gauge the profitability of a company. It should be part of your kit to evaluate investment opportunities.
EBITDA vs Net Income
EBITDA and Net Income both are metrics to judge a company’s efficiency in generating operational profit. In contrast to net income, EBITA measures of net cash flow after excluding the impact of external factors like tax, interest payment, depreciation, and amortisation.
EBITDA, as you have guessed, is Earning before Interest Tax Depreciation and Amortisation. So the equation used in calculating EBITDA is following.
EBITA = Net Income +Taxes + Interest Expenses + Depreciation + Amortisation
EBITDA is used to compare the profitability of different companies from a sector while making an investment decision. On the other hand, net income is the company’s earnings after deducting non-operational expenses. In other words, it is a measurement of a company’s net profit, stated in the financial statement. Some companies report EBITDA because it minimises the impact of external factors beyond the scope of control of them.
However, there are both pros and cons of using EBITDA like the following.
- EBITDA helps you compare the earning efficiency of companies and industries, separate from external influences. The company with a higher EBITDA makes an attractive investment option
- EBITDA calculates net profit of the company before non-operational expenses, while net income measure earning per share
- Since EBITDA doesn’t take into account all aspects of a business, it might overstate cash flow
- Investors must keep in mind that companies may use EBITDA to inflate their profitability
The Bottom Line
Investors mustn’t consider EBITDA alone. There are several other metrics like cash flow, which is the company’s llifeblood and gives a better measure of its viability.