The EBITDA represents one of the most popular metrics in business today. You’ll find it on most reports but what exactly is it and how do you use it? In this article, we look at the different uses of EBITDA and how to use the EBITDA calculator to help calculate this metric.
The term EBITDA stands for earnings before interest, tax, depreciation, and amortization. It is a very useful number for investors to look at. It is basically a company’s operating cash flow. However, it does include non-cash charges like depreciation and amortization, which is why it is important to add back in these charges to get to the cash flow.
Our EBITDA calculator allows you to see how these figures are calculated and the impact they will have on your bottom line. It is an essential tool for any business owner or manager. This calculator can help you understand the health of a business. Read on to find out more about EBITDA and why it is important.
What Is EBITDA?
EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s profitability that takes into account the company’s operating costs. As a matter of fact, it’s intended to gauge the company’s operating profit prior to depreciation and amortization as well as the deduction of interest and taxes.
EBITDA is often used by analysts to determine how much a company can afford to pay in dividends because it excludes taxes and other expenses. It is also used by investors when they want to estimate the amount of cash flow available to pay dividends or to repay debt.
This useful indicator enables us to estimate the company’s real capabilities. It also lets us compare the profitability of different companies, providing that they don’t have the same financial strategy or tax system.
EBIT vs. EBITDA
EBITDA and EBIT are very similar metrics. Simply put, EBITDA can be treated as EBIT that is expanded by two values: amortization and depreciation. We will provide more information about these two metrics for better understanding.
EBIT
What is EBIT? It is a measure of a company’s profitability before the deduction of interest and taxes. That said, this measure excludes the impact of interest and taxes. It is usually used to compare the performance of two or more companies when they have different capital structures.
However, it can also be used to evaluate the financial performance of a single company before taking into account interest and taxes. So, EBIT demonstrates the true ability of the company to make profits. It is one of the most important financial metrics that investors use to assess the performance of companies.
EBIT allows you to gauge a company’s potential and go from there. That’s why it is extremely useful when buying an enterprise. It also comes in handy when comparing various companies that have different strategies or operate in dissimilar tax systems.
EBITDA
As for EBITDA, it’s also used to compare the operating profits or profitability of companies based on information on their basic activities. Similarly, their tax systems, as well as financial strategies, are omitted.
In addition to reviewing EBITDA statements, you should also check the EBIT value of your competitors (if they are available). Focus on companies in your industry to see how your business measures up. It plays a role in measuring business performance.
A good EBITDA is generally greater than 10. The companies listed as the S&P 500 feature the EBITA value that ranges anywhere from 11 to 14.
EBITDA Formula: How to Calculate It?
EBITDA can be calculated by subtracting an entity’s interest expense, taxes, depreciation, and amortization expenses from its earnings before these items are calculated. When calculating EBITDA, the interest expense that was paid to the company’s creditors and the depreciation expense for assets that have been used in production are not deducted. In this case, EBITDA is calculated by subtracting these two items from earnings before taxes or net income.
The EBITDA formula is as follows:
EBITDA = operating profit + depreciation expense + amortization expense
- Operating profit: Operating profit is a company’s net income less its operating expenses. It is calculated by subtracting operating expenses from net income. Actually, the operating profit is the money left over after all of the company’s costs are paid for. The following equation calculates a company’s operating profit: Operating Profit = Net Income – Operating Expenses
- Depreciation expense: Depreciation is a method of amortizing the cost of an asset over its useful life. The cost of an asset is allocated over time to reflect that the asset wears out, becomes obsolete, or otherwise loses its value with time. The depreciation expense for each period reflects the decline in value from one accounting period to another. Depreciation is one form of a broader group of expenses called “costs of goods sold.”
- Amortization expense: Amortization is an accounting technique for allocating the cost of an intangible asset to expense over its useful life. It’s also called depreciation, and it is a non-cash expense. It can be calculated by taking the purchase price of the intangible asset, subtracting any salvage value, and dividing it by the expected useful life of the intangible asset. The calculation can be done on a monthly basis or on a yearly basis depending on how often you expect to use this asset.
Example:
- Operating Profit: $50,000
- Amortization Expense: $1,000
- Depreciation Expense: $2,000
EBITDA = $50,000 + $1,000 +$2,000
EBITDA = $53,000
In our example, the EBITDA value is equal to $53,000. You can also use the following formula when calculating EBITDA:
EBITDA = E + I + T + D + A
Where:
- E is net income
- I = interest
- T stands for taxes
- D means depreciation
- A is amortization
It is always a good idea to learn how to calculate something by hand. Nevertheless, we recommend that you use our calculator when calculating EBITDA. With this tool, you will be able to get the result in no time. Based on the result provided, you can quickly determine the profitability of companies and the amount of free money that is left after their operations. It is very important for business valuation.