EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a typical metric used to calculate the overall performance of any company. You can also see in as a proxy of cash flow statements.
EBITDA is used to calculate the operating income of any company because it does remove non-cash and non-operating expenses from the list. It is for to show the firm overall performance without accounting its capital structure.
The formula for calculating Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA = Operating Profit + Depreciation + Amortization
We have also added the explanation of each component below.
To finalize the final structure performance of the company. Interest gets excluded because the money comes or goes from interest is the money we borrowed or the money we had invested. There are different companies which run through a different capital structure, and that results in getting different interests. Meanwhile, It is easy to compare the performance by adding interest back without affecting the original capital structure.
Taxes are something that every business owe to the governments. However, the tax rates can be different as per the region, but it has to be paid by seeing the overall performance of the company and checking the total revenue earned annually by the firm.
Depreciation & Amortization:
Depreciation & Amortization depend upon the historical performance of the company. Example: The company invested in buying some Fixed assets like building, property, and after the sometimes, the same thing loses its value and go for a sale in lower rates. Then the loss of the company can be defined by Depreciation.
Amortization is limited as this applicable to intangible assets and thus only applicable if the patents are not secured enough.
Calculation of EBITDA:
We know the formula for getting EBITDA calculated but, we know that you will love to check out the example of calculation of EBITDA as well.
Company ZYC accounts for their $20 depreciation and amortization expense as a part of their operating expenses. Calculate their Earnings Before Interest Taxes Depreciation and Amortization:
The things we need to know:
Revenue 100$, Costs of good sold 20$, Gross profit 80$, operating expenses 25$, Operating profit 55$, Interest Expense 10$, Earnings before taxes 45$, Tax expense 20$, Net income 25$.
This is enough to get EBITDA (Earnings before interest taxes depreciation and Amortization)
EBITDA = Net Income + Tax Expense + Interest Expense + Depreciation & Amortization Expense
= $25 + $20 + $10 + $20
EBITDA = Revenue – Cost of Goods Sold – Operating Expenses + Depreciation & Amortization Expense
= $100 – $20 – $25 + $20
EBITDA is not recommended by GAAP or IFRS. It is because it represents the company as it has never paid any taxes before.
Example: A fast-growing company should be paying attention to getting a perfect annual statement that includes everything.
EBITDA (Earnings before income, Taxes, Depreciation, and Amortization) This is something we use to calculate the actual performance of the company by deducting the taxes and interests that the company paid over the year.
I do recommend using this formula if you want to know the company’s actual performance just by not adding the tax and interests.