What is Earning Before Interest Taxes with Depreciation and Amortization
EBITDA is a financial indicator (acronym for Earnings Before Interest Taxes Depreciation and Amortization ) that shows the profit of your company before subtracting the interest you have to pay for the debt incurred, the taxes of your business, the depreciation due to its impairment, and the amortization of the investments made. The purpose of EBITDA is to get a true picture of what the company is gaining or losing at the core of the business.
Although it is not part of the companies’ income statement, EBITDA is a ratio that allows you to quickly and easily know if your business is profitable or not , since it represents the gross operating profit calculated before the deductibility of financial expenses.
How is EBITDA calculated?
EBITDA is calculated from the final operating result of the company, without incorporating financial elements (interest on debt), tax (taxes), changes in the value of fixed assets (depreciation) and recovery of the investment.
Steps to calculate EBITDA:
- The first thing to do is take into the income statement the Operating Result, which is also called EBIT (Earnings Before Interests, Taxes).
- To this figure must be added the amounts destined to endow provisions.
- Finally, the amount corresponding to productive depreciation is also added.
What is EBITDA for? Earnings Before Interest Taxes
These are some of the main contributions of EBITDA:
- Its main utility is that it shows you the results of your project without considering financial or tax aspects . That is, it allows you to know if the engine of your company, the business itself, works or not beyond other adjustments or how you have financed it. For EBITDA, the important thing is to know how much your project can generate. Thus, if this indicator is positive in your business, it means that, in principle, it is profitable, and that its success will depend on the management you make of financial expenses, as well as taxation, depreciation and amortization policies. In the same way, if you get a negative EBITDA, you should consider the continuity of your project.
- It is also very useful to compare companies , their historical data, their health and vitality, since it shows information that is not affected by financial leverage, taxes or amortization costs, which in certain companies are very high. In addition, it allows to measure in homogeneous terms the profitability of different companies, even of different countries.
- It can also be used to see the creditworthiness of your company at a glance . And, with this indicator you can estimate, in a more abbreviated way, what is the available cash flow of your company. That is, it shows you how much money your business has left to pay its debts after deducting its most important expenses.