Master EBITDA calculation with CalcoPolis.
Table of Contents
- What is EBITDA?
- EBITDA Formula
- How to calculate EBITDA?
- Applications of EBITDA
- EBITDA can be used to assess a company's profitability
- EBITDA can be used to compare companies
- To compare against industry benchmarks.
- Limitations of EBITDA
- EBITDA Ignores Costs of Assets
- EBITDA is prone to manipulation
- EBITDA Obscures Company Valuation
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization is the financial metric of a company's profitability. EBITDA can be equivalent to the net income in some cases.
EBITDA gained widespread usage. After all, it is a very accurate indicator of a company's profitability because it shows income before accounting deductions like depreciation and amortization.
Since EBITDA focuses solely on earnings, it is a good tool for performing comparisons between the companies and the industry benchmarks. By skipping interest and tax expenses, depreciation, and amortization, it is easier to analyze the financial performance of companies from different industries, markets, and countries.
Apart from its benefits, such an approach has its drawbacks since it does not consider the cost of investments like property, plants, and equipment PP&E.
- EBITDA is one of the most commonly used financial profitability metrics.
- EBITDA could be treated as the net income of the company.
- EBITDA allows companies to compare each other against industry benchmarks.
- EBITDA can be used to assess if a company could pay its long-term debt obligations.
How to calculate EBITDA?
EBITDA calculation is easy for two reasons: the EBITDA equation is fairly simple, and all the information needed is easy to access since there are either parts of the income statement or balance sheet.
EBITDA = Net Income + Income Taxes + Interest Expense + Depreciation & Amortization
EBITDA = Operating Income + Depreciation & Amortization
Which is equivalent of:
EBITDA = EBIT + Depreciation & Amortization
EBIT - Earnings before interests and tax is a similar metric of profitability. For more details, visit our EBIT calculator.
Amortization - an accounting method of periodically lowering the book value of a company's assets over a period of time.
Applications of EBITDA
EBITDA can be used to assess a company's profitability
Earnings Before Interest, Taxes, Depreciation, and Amortization gained widespread usage in measuring the profitability of companies.
For investors, it simplifies financial analysis since interest expenses, tax obligations, amortization, and depreciation require a very good understanding of a company and its business model. Investors can tell how well a company performs its day-to-day business activities by focusing on EBITDA analysis.
In most countries, there is no obligation to disclose EBITDA in the financial reports, but companies do it anyway since it has become the international standard.
EBITDA can be used to compare companies
Since companies may have not only completely different business models, different sources and costs of financing, and even can operate within different tax jurisdictions. Investors look for ways to simplify comparisons of different enterprises. Using EBITDA brings many benefits.
First of all, it deducts interest expenses from the costs. Thanks to this, it is easier to see the company's efficiency regardless of the level and cost of external financing.
Another advantage of EBITDA is skipping tax expenditures, so differences in tax rates between regions do not disturb the analysis.
The last biggest advantage is omitting depreciation and amortization since, for companies with high value of fixed assets, such expenses increase accounting costs that do not impact regular operating efficiency.
To compare against industry benchmarks.
Since EBITDA became the de facto industry standard, it is relatively easy to find benchmark values of EBITDA for any industry. By comparing the EBITDA value for the company with the average industry value, investors gain a quick overview of the company's operating performance in relation to its competitors.
Limitations of EBITDA
Although EBITDA is a very useful metric, it's important to understand its quirks in order to be able to derive the right conclusion from the financial analysis of the enterprise. Below we describe some biggest disadvantages you need to understand before you use our EBITDA calculator.
EBITDA Ignores Costs of Assets
Since depreciation and amortization are deducted from earnings, for the companies with high value of fixed assets like property, plants, and equipment (PP&E), EBITDA is not a good proxy for business valuation.
EBITDA is prone to manipulation
While the calculation of EBITDA may seem simple, accountants can manipulate the indicator's value by using different earning figures as a starting point for EBITDA.
EBITDA Obscures Company Valuation
If you base a company valuation on the EBITDA multiple, you need to know that due to the previous point, EBITDA cannot be the only metric to base the valuation on.
There are other methods for calculating company's value for more details visit or Enterprise Value Calculator.