What is EBITA and How is EBITA Calculated?

It is fair to say that every aspect of a modern business including marketing, advertisements, budgeting, client retention, planning, etc., relies heavily on numbers.

Businesses and investors are always striving to find accurate financial metrics to determine a company’s efficiency and profitability. EBITA is one such tool that allows you to measure any company’s profit-making ability and true potential.

In other words, it enables you to make accurate forecasts about a business to guide your decision-making process.

Most people however don’t even know what ebita means and how to calculate it. We are here to tell you that it is no rocket science and even you can do it easily if you just know how to.

Here is all you need to know about EBITA

• What Does EBITA Mean?
• EBITA: Understanding and Significance
• How to Calculate EBITA?
• Uses of EBITA
• Practical Example
• What is a Good EBITA?

What Does EBITA Mean?

We are certain, as an investor, at one point or another you might have caught yourself wondering what Ebita stands for and what Ebita means? 

EBITA stands for Earnings before Interest, Taxes, and Amortization and it is a measure of a company’s profitability as compared to others in the same industry. By eliminating the impacts of taxes owing, interest on corporate tax, and amortization, EBITA gives you a pretty good estimation of the true earnings of a company.

In EBITA calculation, the costs of capital assets are taken into account while the non-operating associated financing costs and amortization of intangible assets are ignored. This gives a more accurate representation of a company’s overall performance and profitability. 

Investors and property management services use EBITA to measure a company’s cash flow before investing. It lets them know how much cash is available for a company to pay dividends or settle debts. This way they can make good estimations about the financial strength and standing of any business. 

EBITA: Understanding and Significance

EBITA allows you to measure the financial performance of a company excluding capital investments like equipment, property, etc. Using this tool, you can get a good estimate of a company’s profits before account adjustment and deductions.     

By ignoring factors like taxes, interest, and amortization, EBITA shows you how well a company is performing financially. It is a crucial metric that demonstrates the operational effectiveness of any business and the available cash flow for reinvesting or paying dividends.

A positive EBITA value indicates the overall efficiency of an operation by considering its cash flow, while a negative EBITA value shows a company is not able to manage its cash flow properly and is making less profit. 

EBITA can also be used by lenders and bankers to compare the operating success of various companies. This can help them know how creditworthy a certain business is by looking at its real earnings which show their ability to settle debts without defaulting.

Though a higher EBITA figure is good it should also be accompanied by high net income. In some cases, businesses take huge loans when expanding their operations which affects their future net income.

Here EBITA can help you anticipate the financial future of a company once the loads are paid or the debts are settled.

How to Calculate EBITA?

You can find EBITA by using any one of the following methods

1. Direct Method

Here is how to calculate Ebita using the direct method

EBITA = Total Revenue – COGS – (Operating Expenses – Amortization)

Here COGS stands for costs of goods sold. This method is used when companies provide a detailed breakdown of their operating costs or the costs of goods sold in their financial statements. 

If this information is not provided, you can use the indirect method which is described in the next section.

2. Indirect Method

The formula for the indirect method of calculating EBITA is

EBITA = Net Income + Interest + Taxes + Amortization

Where

Net Income = is the net amount that is left after deducting all operational costs from your total revenue.

Interest = includes interest rates for loans from banks or lenders.

Taxes = These are location-based and have different requirements in each jurisdiction.  

Amortization = is a non-cash item that includes the costs of intangible assets like licenses, patents, trademarks, etc.

The above information is always a part of the income statement of any business which makes the indirect method a more straightforward way to find EBITA. 

Uses of EBITA

The following are the main uses of EBITA

• It can accurately track cash flow and assess the ability of a business to settle debts and pay dividends.
• Helps you estimate true earnings and consequently the operational efficiency of a business.
• It can help investors make more informed decisions by comparing the cash flow of a company with others of the same kind.
• Lenders and banks can use it to verify a company’s creditworthiness.
• It can serve as an accurate and reliable profitability metric.

Practical Example

Here is an example to help you understand how EBITA works. Consider a company that wants to know how well it performed in the last financial year. Following is their detailed income statement.  

EBITA = Net Income + Interest + Taxes + Amortization

EBITA = 21,000,000 + 5,000,000 + 4,000,000 + 10,000,000

EBITA = AED 40,000,000

This calculation shows that even though the net income of the businesses reduced to 21 million, the earnings before tax and amortization saw an increase due to the positive EBITA value.

What is a Good EBITA?

It goes without saying that a positive EBITA is always preferred. The higher it is the lower your operating expenses will be compared to your revenue. 

You also need to keep in mind that EBITA mainly reflects cash flow and different companies have different cashflows based on their current stage of growth which can affect their EBITA values accordingly.

As a rule of thumb, a 10% EBITA margin is considered good since it shows the investors that they can expect higher dividends or a greater return on their investment.  

Conclusion

EBITA is a reliable financial metric that can help businesses and investors figure out how much a company or investment is worth. It reflects the operating profitability of a company and gives you a measure of its true performance and efficiency.

By utilizing this ingenious tool, you can determine the true potential of a business without taking into account the effects of amortization, interest, and taxes.

Lenders also use this tool to assess the creditworthiness of a business by looking at its real earnings and consequently its ability to pay the debts.

So, utilize EBITA the next time you want to determine how much profit a certain business or investment can generate. This will help you avoid making major financial mistakes and decisions based on inaccurate numbers.

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