EBITA Meaning, Formula, And Calculation Methods Explained

What is EBITA?

The acronym EBITA refers to a company’s earnings without accounting for interest, tax, and amortisation expenses. (Amortisation is the decline in value of an intangible asset – such as a licence, patent, or trademark – over time). The EBITA is a reflection of the operating profitability of a company as it excludes non-operating expenses such as interest payments, taxes, and amortisation. It is used to determine what a company’s true earnings are and, as a result, its true performance and efficiency. Investors also consider EBITA to be a reliable measure of cash flow, telling them how much available cash a company has in order to invest, pay dividends, or settle debts.

The EBITA is used alongside two other financial metrics that also measure profitability – EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation, and amortisation). Read about the differences between the three lower down in the article.

Why is EBITA important?

A company’s EBITA value is a reflection of its true earnings. By disregarding expenses and income associated with interest, taxes, and amortisation of intangible assets – which are not directly related to the success of a business – it presents a more accurate picture of a company’s financial strength and standing.

The EBITA accounting practice is also widely used to analyse the efficiency of a company’s operations. A positive EBITA value indicates operational efficiency and points to healthy cash flow that can be used to pay for dividends and for reinvestment in the business. In contrast, a negative value shows deficient cash flow and might signal poorly managed operations.

Investors use EBITA to compare and evaluate different companies. This metric accurately portrays a company’s cash flow and, in turn, its ability to pay dividends to its shareholders. By comparing the EBITA values of similar companies, they can home in on the one that promises the highest dividends.

Similarly, banks and other lenders use EBITA accounting to gauge a company’s capacity to settle its debts without defaulting.

Five Uses of EBITA

How to calculate EBITA

To calculate EBITA, you will first need to figure out a company’s earnings before tax (EBT). Once that’s done, a simple EBITA formula can be used for the calculation:

EBITA = EBT + Interest expense + Amortisation expense

All of the components of the EBITA formula can be found in a company’s financial statements. Earnings, tax, and interest figures are found on the income statement while the amortisation amount is usually located on the cash flow statement. 

Alternatively, you can use this EBITA formula if you know the EBIT value:  

EBITA = EBIT + Amortisation expense

As previously mentioned, the EBITA value can be positive or negative (which is undesirable). The higher the EBITA amount, the more available cash a company has.

Methods to calculate EBITA

There are two methods to calculate EBITA – the direct method and the indirect method.

Direct method

The direct method of calculating EBITA involves subtracting the cost of goods sold (COGS) and operating expenses (minus amortisation) from total revenue. The EBITA formula, therefore, is:

EBITA = Total Revenue – COGS – (Operating expenses – Amortisation)

This is called the direct method because the result is derived straight from gross revenue. However, some companies may not give a breakdown of their operating expenses and cost of goods sold. In such cases, how to calculate EBITA? By using the indirect method, that’s how.

Indirect method

The indirect method to calculate EBITA involves adding interest, taxes, and amortisation back to net income. Net income is revenue minus taxes, interest, depreciation, and all other expenses. The EBITA formula under the indirect method is: 

EBITA = Net income + Interest + Taxes + Amortisation

The indirect method is a straightforward calculation as all the components are easily found on the company's income statement.

EBITA example

Let’s say, company ABC released the following details in its financial statement for 2022: 

Now, using the EBITA formula under the indirect method:

EBITA = Net income + Interest + Taxes + Amortisation

EBITA = 560,000 + 15,000 + 25,000 + 4,000

EBITA = SGD 604,000

Now, in a bid to increase revenue in the following year (2023), the company took a loan to buy more inventory. At the end of the year, the company reported a jump in revenue but a decline in net income.

Now the calculation:

EBITA = 545,000 + 60,000 + 55,000 + 4,000

EBITA = SGD 664,000

A comparison of the EBITA values for the two years shows that while net income decreased by SGD 15,000 in the second year, EBITA increased by SGD 60,000. In an ideal situation, though, a higher EBITA should also lead to a higher net income.

What is EBITA margin?

Apart from the pure EBITA value, analysts use the EBITA margin to compare businesses within the same industry. To calculate EBITA margin, you need to divide EBITA by total revenue. The EBITA margin – represented as a percentage – shows how high revenue is before taxes, interest expenses, and amortisation are subtracted. It is, therefore, indicative of a company’s cash operating profit margin. A high EBITA margin is taken as a sign of stable earnings.

What is adjusted EBITA?

Adjusted EBITA is what you get when you make an adjustment to the EBITA formula by removing one-time, non-recurring, irregular items that might distort the EBITA value. The adjustment is made by adding or subtracting the non-routine income or expense, such as litigation costs, gains or losses on foreign exchange, higher-than-average owner’s compensation, etc. Adjusted EBITA is used to normalise income and expenses, given that many businesses have certain earnings and costs that are unique to them. By doing so, adjusted EBITA makes it possible to compare multiple businesses. Adjusted EBITA is widely used to evaluate companies for transactions such as sales, mergers, and acquisitions.

Know the difference EBITA vs EBIT

The EBIT value stands for earnings before interest and savings. By ignoring costs related to debt financing and taxes, EBIT focuses purely on operational performance. It is, therefore, indicative of the strength of a company’s core operations. In contrast, EBITA focuses on a company’s cash flow and is representative of its true earnings. While both metrics offer useful insights, the best results are achieved when they are used together.

Know the difference EBITA vs EBITDA

Earnings before interest, taxes, depreciation, and amortisation (EBITDA) differs from EBITA by adding depreciation and amortization expenses to the mix. Depreciation is a measure of the gradual decline in value of a tangible asset (buildings, machinery, etc) over its lifetime. Both EBITA and EBITDA are used to analyse performance and profitability. But EBITDA is more suitable for evaluating companies with high investments in fixed assets such as property, equipment, and plants. For this reason, EBITDA is often used by analysts and lenders to compare large businesses with significant fixed assets and/or high levels of debt. However, for businesses with low to modest tangible assets, both EBITA and EBITDA are considered suitable indicators of performance.

What is a good EBITA?

As you now know, a positive EBITA is preferred over a negative one. And the higher the EBITA, the lower the operating expenses compared to revenue. However, analysing EBITA is more complicated than that. Remember that EBITA reflects cash flow, and companies in different stages of growth have different cash flow situations, which impacts EBITA. For instance, a company that’s just starting out will have very high cash requirements and, therefore, a low EBITA. In contrast, an established business will not have the initial high investment requirement, leading to more cash in hand and a higher EBITA. When comparing companies, investors tend to go with the one that has the higher EBITA value because they expect higher dividends or a greater return on investment. As a rule, a 10% EBITA margin is considered a good bet.

That said, there is no absolute value for what a good EBITA figure is. Industry, business size, growth stage, the company's financial performance and health are some of the multiple factors that influence EBITA. It is best to use EBITA alongside other financial metrics to accurately evaluate companies.

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