EBITDA is an economic analysis indicator that reflects the company's profit before taxes, depreciation and amortization expenses and interest payments on loans.
The economic meaning of EBITDA
When is EBITDA applied? Its initial purpose was to analyze the attractiveness of takeover deals with borrowed funds. Today it is used for broader purposes.
Thus, EBITDA makes it possible to assess how profitable the company's core business is, as well as its effectiveness, regardless of the size of credit debt and tax burden. Due to EBITDA, the depreciation method is irrelevant in determining the company's profit.
The indicator is used to conduct a comparative analysis in relation to competitors, to assess the value of a business before selling. Based on it, investors evaluate the return on investment. The indicator is used in the analysis of the company's operating results, since it does not contain non-monetary items of costs.
It is worth noting that many economic analysts criticize EBITDA. Since it does not include indicators of the company's capital expenditures (depreciation). It turns out that the company can spend huge sums on new equipment, and EBITDA will remain unchanged. According to critics, the company's financial condition reflects the indicators of "profit" and "operating flow of payments" more realistically.
How to calculate EBITDA
EBITDA is calculated based on the company's financial statements in accordance with international standards IFRS and GAAP. But EBITDA is not part of these standards, it is calculated for the designated purposes using the following formula:
(net income + income tax expense - income tax refunded + interest paid - interest received) = EBIT + (depreciation expense - asset revaluation) = EBITDA.
It is problematic to accurately calculate the indicator on the basis of reporting in accordance with Russian Accounting Standards (RAS) due to the lack of the necessary information. An approximate calculation can be made taking into account the following EBITDA indicators = Profit from sales (page 50 F. No. 2) + Depreciation deductions (Form No. 5). This formula has some error.
In addition to EBITDA, its derivative Debt / EBITDA ratio is often used to analyze the company's debt burden. It reflects the ratio of financial results and debt burden of the company. The ratio serves as evidence of the company's ability to fully repay the entire amount of obligations and reflects the level of its solvency. If it is high enough, it serves as a dangerous signal of problems with debt burden. The Debt / EBITDA ratio is often used by analysts to evaluate publicly traded companies.
Along with EBITDA, intermediate indicators are often used: EBIT (profit before interest on loans and taxes); EBT (profit before taxes); OIBDA (operating profit before depreciation); NOPLAT (net operating income minus taxes).