When entrepreneurs and investors want to evaluate the attractiveness of a business, they calculate and analyze various indicators that help them understand how efficiently the company operates . One of these is EBITDA.
In fact, EBITDA is the company’s profit, but an unusual one. In reports, it is neither revenue nor net profit of the enterprise. The indicator is used directly in the analysis of operational efficiency and in comparing different companies. When, for example, you need to find out whether the business is profitable without reference to some external factors and time frames.
What is EBITDA in simple terms
EBITDA is a key indicator for analysts, executives, financiers and bankers. It allows you to evaluate *the operating efficiency of a company, most often for a year: to show executives how successfully the company is functioning, and to investors – how quickly investments can pay off.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Simply put, the number shows how much profit a company makes after deducting certain expenses:
Why is this indicator usually calculated?
EBITDA helps and can be a valuable tool for both internal users – managers and analysts, and external users – investors, banks.
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External users can calculate EBITDA themselves. More information can be obtained from the company’s financial statements. With its help, for example, investors can compare several companies and draw certain conclusions: whether it is worth issuing a loan or investing in development at this time.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Simply put, the number shows how much profit a company makes after deducting certain expenses.
Why is this indicator usually calculated?
EBITDA helps and can be a valuable tool for both internal users – managers and analysts, and external users – investors, banks.
External users can calculate EBITDA themselves. More information can be obtained from the company’s financial statements. With its help, for example, investors can compare several companies and draw certain conclusions: whether it is worth issuing a loan or investing in development at this time.
Internal users evaluate the final financial state of their project, assets. In this way, managers understand whether the company can afford to invest more money in fixed assets, popular products, expand, improve work efficiency: purchase new equipment, buildings, workshops, etc.
1. Comparisons of companies in similar industries. The fact is that tax payments, interest rates and the method of calculating depreciation can vary greatly. This depends on the market situation, the country, the company’s priorities, individual conditions, and so on. EBITDA allows you to more objectively assess how successfully one company is conducting its core business compared to others.
How Companies Calculate EBITDA
In general, EBITDA is an optional indicator for Russian reporting. To a greater extent, foreign companies work with it according to IFRS (International Financial Reporting Standards), as well as domestic organizations that are focused on the international market.
All the data required for the calculation can be found new year marketing: the best holiday advertising techniques in the organization’s financial statements. EBITDA is calculated in different ways. The main methods for calculating the indicator are discussed below.
EBITDA calculation formula:
These two formulas are similar. But they are used in different situations with a certain set of available data. Remember that EBITDA of companies is not the most unified and standardized indicator, so it can be adjusted.
What indicators are calculated based on EBITDA
This indicator is used not only as a separate independent unit. EBITDA is an important component of financial multipliers*. They reflect the financial condition, performance and efficiency of the organization and provide an opportunity to clearly compare businesses with each other. This way, you can quickly start looking for changes, deviations, growth points.
Let’s consider the main, most important and useful coefficients.
EBITDA marginEBITDA margin is one of the types of profitability: EBITDA margin. It shows what percentage of total revenue is EBITDA. This multiple is useful for assessing the company’s operating efficiency and its ability to control costs. It is calculated as follows:
The higher the indicator, the better for the business. This will mean that the organization has relatively small operating costs in relation to total revenue, which, accordingly, increases its profitability. In simple words, the company earns more.
A normal indicator for EBITDA margin is considered to be 12% or more. If the ratio is lower, then, most likely, after paying all expenses (taxes, interest, depreciation), the business may be unprofitable.
The degree of debt load of the company – Debt EBITDA
The ratio helps to estimate how long it will take the company phone number list to pay off all its debt obligations at the current EBITDA level without attracting additional investments. It indicates the presence of problems, the financial stability of the company and its ability to service its own debt. Calculation formula:
It is believed that if the debt-EBITDA multiplier value exceeds 3-4 years, then the organization is over-indebted. The conditions do not allow it to develop actively. It will take a long time to repay the loan. Investors will not take risks and invest in such a company, since it will be difficult to receive good dividends.
Enterprise value
The multiple, or EV/EBITDA ratio, shows how many times the fair market value of the company EV — (Enterprise Value) exceeds its annual EBITDA. That is, how much annual profit, excluding taxes, depreciation, and interest on loans, the company must earn to recoup its market value.
Enterprise Value takes into account both the cost of equity and the debt load of a company. A high EV/EBITDA is an indicator that the company may be overvalued, while a low EV/EBITDA is an indicator that the company may be undervalued. However, these conclusions will depend on industry norms and the specifics of the business.
Comparing EBITDA with similar indicators
In addition to EBITDA itself, other metrics should be taken into account, which generally perform similar tasks, although they have their own calculation features. Let’s look at several main ones as an example and compare them with EBITDA.
