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{{Short description|Accounting measure of a company's profitability}} |
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{{More citations needed|date=August 2013}} |
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'''EBITDA''' ({{IPAc-en|iː|b|ɪ|t|'|d|ɑː}},<ref>Professional English in Use Finance, Cambridge University Press</ref> {{IPAc-en|ə|'|b|ɪ|t|d|ɑː}}),<ref>{{cite web|url=http://www.howjsay.com/index.php?word=ebitda |title=Pronunciation of ebitda - how to pronounce ebitda correctly |publisher=Howjsay.com |date=2006-10-29 |accessdate=2012-01-21}}</ref> or {{IPAc-en|'|ɛ|b|ɪ|t|d|ɑː}}<ref>{{cite web|url=http://www.alphadictionary.com/goodword/word/EBITDA |title=EBITDA - alphaDictionary * Free English On-line Dictionary |publisher=Alphadictionary.com |date=2001-05-03 |accessdate=2012-01-22}}</ref> <!-- unsourced, apparently incorrect: {{IPAc-en|iː|'|b|ɪ|t|d|ə}}--> is an [[acronym]] for '''[[Profit (accounting)|equity]] before [[interest]], [[taxes]], [[depreciation]], and [[amortization (tax law)|amortization]]'''.<ref>{{cite web|url=http://glossary.reuters.com/index.php/EBITDA |title=EBITDA - Financial Glossary|publisher=Reuters |date=2009-10-15 |accessdate=2012-02-09}}</ref> As its name suggests, it is created by considering a company's earnings before interest payments, tax, depreciation, and amortization are subtracted for any final accounting of its income and expenses. The EBITDA of a company gives an indication of the current operational profitability of the business (i.e., how much profit does it make with its present assets and its operations on the products it produces and sells).{{Citation needed|date=August 2013}} |
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A [[company]]'s '''earnings before interest, taxes, depreciation, and amortization''' (commonly abbreviated '''EBITDA''',<ref>{{cite web |url=http://glossary.reuters.com/index.php/EBITDA |title=EBITDA - Financial Glossary |publisher=Reuters |date=October 15, 2009 |access-date=February 9, 2012 |archive-url=https://web.archive.org/web/20120630234803/http://glossary.reuters.com/index.php/EBITDA |archive-date=June 30, 2012 |url-status=dead }}</ref> pronounced {{IPAc-en|iː|b|ɪ|t|'|d|ɑː}},<ref>Professional English in Use Finance, Cambridge University Press</ref> {{IPAc-en|ə|'|b|ɪ|t|d|ɑː}},<ref>{{cite web|url=http://www.howjsay.com/index.php?word=ebitda |title=Pronunciation of ebitda - how to pronounce ebitda correctly |publisher=Howjsay.com |date=October 29, 2006 |access-date=January 21, 2012}}</ref> or {{IPAc-en|'|ɛ|b|ɪ|t|d|ɑː}}<ref>{{cite web|url=http://www.alphadictionary.com/goodword/word/EBITDA |title=EBITDA - alphaDictionary – Free English On-line Dictionary |publisher=Alphadictionary.com |date=May 3, 2001 |access-date=January 22, 2012}}</ref>) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandated payments, and costs required to maintain its asset base. It is derived by subtracting from revenues all costs of the operating business (e.g. wages, costs of raw materials, services ...) but not decline in asset value, cost of borrowing, lease expenses, and obligations to governments. |
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Although EBITDA is not a financial metric recognized in [[generally accepted accounting principles]], it is widely used when assessing the performance of companies. It is intended to allow a comparison of profitability between different companies, by canceling the effects of interest payments from different forms of financing (by ignoring interest payments), political jurisdictions (by ignoring tax), collections of assets (by ignoring depreciation of assets), and different takeover histories (by ignoring amortization often stemming from [[goodwill (accounting)|goodwill]]).{{Citation needed|date=August 2013}} |
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Though often shown on an [[income statement]], it is not considered part of the [[Generally Accepted Accounting Principles (United States)|Generally Accepted Accounting Principles]] (GAAP) by the [[Securities and Exchange Commission|SEC]],<ref name="sec">{{cite web|title=Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures|url=https://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm|website=www.sec.gov|publisher=Division of corporation finance, SEC, USA|access-date=January 24, 2018}}</ref> and hence the SEC requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to [[net income]].<ref name="forbesebitda" /> |
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A negative EBITDA indicates that a business has fundamental problems with profitability. A positive EBITDA, on the other hand, does not necessarily mean that the business generates cash. This is because EBITDA ignores changes in [[Working Capital]] (usually needed when growing a business), capital expenditures (needed to replace assets that have broken down), taxes, and interest.{{Citation needed|date=August 2013}} |
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==Usage and criticism== |
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Some analysts do not support omission of capital expenditures when evaluating the profitability of a company: capital expenditures are needed to maintain the asset base which in turn allows for profit. [[Warren Buffett]] famously asked: "Does management think the tooth fairy pays for [[capital expenditures]]?"<ref name="forbesebitda">{{cite web| url=http://www.forbes.com/sites/tedgavin/2011/12/28/top-five-reasons-why-ebitda-is-a-great-big-lie/ | title=Top Five Reasons Why EBITDA Is A Great Big Lie | work=Forbes | date=2011-12-28 | accessdate=2012-11-15}}</ref> Depreciation is often a very good approximation of the capital expenditures required to maintain the asset base, so it has been argued{{citation needed|date=November 2012}} that [[EBITA]] ("Earnings before Interest, Taxes and Amortization) would be a better indicator.{{Citation needed|date=August 2013}} |
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EBITDA is widely used when assessing the performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone, i.e. how much profit the business generates by providing the services, selling the goods etc. in the given time period. This type of analysis is useful to get a view of the profitability of the operating business alone, as the cost items ignored in the EBITDA computation are largely independent from the operating business: The interest payments depend on the financing structure of the company, the tax payments in the relevant jurisdictions as well as the interest payments, the depreciation on the asset base (and depreciation policy chosen), and the amortisation on takeover history with its effect on [[goodwill (accounting)|goodwill]] among others. EBITDA is widely used to measure the valuation of private and public companies (e.g. saying that a certain company trades at x times EBITDA, meaning that the company value as expressed through its stock price equates to x times its EBITDA). In its attempt to display EBITDA as a measure of the underlying profitability of the operating business, EBITDA is often adjusted for extraordinary expenses, i.e. expenses that the company believes do not occur on a regular basis. These adjustments can include bad debt expenses, any legal settlements paid, costs for acquisitions, charitable contributions and salaries of the owner or family members.<ref>{{cite web|url=https://www.lutz.us/understanding-ebitda-and-normalizing-adjustments/|title=UNDERSTANDING EBITDA AND NORMALIZING ADJUSTMENTS}}</ref><ref>{{cite web|url=http://exitpromise.com/adjusted-ebitda/|title=Adjusted EBITDA Definition - Free Tool - ExitPromise|date=April 4, 2014}}</ref> The resulting metric is called '''adjusted EBITDA''' or '''EBITDA before exceptionals'''. |
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A negative EBITDA indicates that a business has fundamental problems with profitability. A positive EBITDA, on the other hand, does not necessarily mean that the business generates cash. This is because the cash generation of a business depends on [[capital expenditures]] (needed to replace assets that have broken down), taxes, interest and movements in working capital as well as on EBITDA. |
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'''EBITDA margin''' refers to EBITDA divided by total revenue (or "total output", "output" differing "revenue" by the changes in inventory).{{Citation needed|date=August 2013}} |
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While being a useful metric, one should not rely on EBITDA alone when assessing the performance of a company. The biggest criticism of using EBITDA as a measure to assess company performance is that it ignores the need for capital expenditures in its assessment. However, capital expenditures are needed to maintain the asset base which in turn allows for generating EBITDA. [[Warren Buffett]] famously asked, "Does management think the tooth fairy pays for capital expenditures?".<ref name="forbesebitda"> |
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==Use == |
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{{cite web |
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Apart from the use mentioned above, EBITDA is widely used in [[loan covenant]]s, mostly in the following two metrics:{{Citation needed|date=August 2013}} |
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| url= https://www.forbes.com/sites/tedgavin/2011/12/28/top-five-reasons-why-ebitda-is-a-great-big-lie/ |
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#Leverage: '''Debt/EBITDA'''. This metric measures the amount of debt in relation to the EBITDA (i.e., how does the debt relate to the operational profit generating ability of the company). Whilst there is no absolute target and whilst leverage ratios differ widely, it can probably be argued that a leverage >3 is unhealthy for most businesses. |
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| title= Top Five Reasons Why EBITDA Is A Great Big Lie |
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#Interest Cover: '''(EBITDA/Interest Expense)'''. This metric measures the ability of a company to generate profit out of its operations to cover interest payments. Again, there is no absolute target for this value, as the ratio that is required obviously depends on taxes, working capital needs, capital expenditures and the repayment needs of the principal. However, it is clear that a ratio <1 is not sustainable for long. |
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| work= Forbes | date=December 28, 2011 |
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| access-date= November 15, 2012 |
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}} |
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</ref> A fix often employed is to assess a business on the metric EBITDA - Capital Expenditures. |
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== |
== Margin == |
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'''EBITDA margin''' refers to EBITDA divided by total revenue (or "total output", "output" differing from "revenue" according to changes in inventory).<ref>{{cite web|url= http://www.businessnewsdaily.com/4461-ebitda-formula-definition.html |title= What is EBITDA?|publisher=BusinessNewsDaily |date=May 9, 2013 |access-date=November 15, 2014}}</ref> |
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EBITDA has increasingly become the key metric to show the "intrinsic operational performance" of the business, i.e., the performance when all costs that do not occur in the normal course of business (e.g., restructuring costs, ramp-up costs, consulting fees for special projects, special legal fees) are ignored. While this is helpful in general, it is often misused by declaring too many cost items as "one-offs" and thus boosting profitability. The resulting metric when such "non-normal" costs have been deducted should be called "adjusted EBITDA" or similar, but this "adjusted" nature is often not shown sufficiently clearly.{{by whom|date=November 2012}}{{Citation needed|date=August 2013}} |
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== Variations == |
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Because EBITDA (and its variations) are not measures generally accepted under U.S. [[GAAP]], the [[U.S. Securities and Exchange Commission]] requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to net income in order to avoid misleading investors.{{citation needed|date=November 2012}} |
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{| class="wikitable" style="float:right" |
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|+ Example income statement |
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|- |
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! style="text-align:left;" | Revenue |
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! style="text-align:right;" | $20,000 |
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|- |
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| style="padding-left:2.0em;" | [[Cost of goods sold]] |
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| style="text-align:right;" | $8,000 |
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|- |
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! style="text-align:left;" |Gross Profit |
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! style="text-align:right;" | $12,000 |
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|- |
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| style="padding-left:2.0em;" | Selling, general and administrative expenses |
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| style="text-align:right;" | $7,000 |
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|- |
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! style="text-align:left;" | Earnings before interest, taxes, depreciation and amortisation (EBITDA) |
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! style="text-align:right;" | $5,000 |
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|- |
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| style="padding-left:2.0em;" | [[Depreciation]] and [[amortization (accounting)|amortisation]] |
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| style="text-align:right;" | $1,500 |
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|- |
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! style="text-align:left;" | Earnings before Interest and taxes (EBIT) |
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! style="text-align:right;" | $3,500 |
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|- |
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| style="padding-left:2.0em;" | Interest expenses and income |
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| style="text-align:right;" | $300 |
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|- |
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! style="text-align:left;" |Earnings before income taxes (EBT) |
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! style="text-align:right;" | $3,200 |
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|- |
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| style="padding-left:2.0em;" | [[Income tax]]es |
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| style="text-align:right;" | $1,000 |
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|- |
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| Earnings after tax (EAT) or '''Net income''' |
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| style="text-align:right;" | $2,200 |
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|} |
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=== EBITA === |
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In another attempt to boost EBITDA, some companies{{examples|date=November 2012}} have reverted to activate development efforts in the [[profit and loss statement]]. This effectively increases total output and hence increases EBITDA. Such development costs are then recorded as capital expenditures. Instead of EBITDA, a view on EBITA (as discussed above) would eliminate such an artifact.{{Citation needed|date=August 2013}} |
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'''Earnings before interest, taxes, and amortization''' ('''EBITA''') is derived from EBITDA by subtracting Depreciation.<ref>{{cite web |url=http://www.investopedia.com/terms/e/ebita.asp |title=EBITA |access-date=November 30, 2014 }}</ref> |
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EBITA is used to include effects of the asset base in the assessment of the profitability of a business. In that, it is a better metric than EBITDA, but has not found widespread adoption. |
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=== EBITDAR === |
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{{glossary}} |
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{{term|Earnings before interest, taxes, depreciation, amortization, and rent costs|'''Earnings before interest, taxes, depreciation, amortization, and rent costs''' ('''EBITDAR''')}} |
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{{defn| |
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EBITDAR is derived from EBITDA by adding rent costs to EBITDA. It can be of use when comparing two companies in the same industry with different structure of their assets. For example, consider two nursing home companies: one company rents its nursing homes and the other owns its homes. The first business has rent expenses which are included in EBITDA whereas the second company has capital expenditures instead which are not included in EBITDA. Comparing these business on EBITDA level thus is not the right metric and EBITDAR addresses this problem. Other industries where EBITDAR is employed are e.g. hotel businesses or trucking businesses.<ref>{{Cite news|url=https://marketrealist.com/2014/10/why-ev-ebitdar-multiple-best-valuing-hotel-companies/|title=Why the EV/EBITDAR multiple is best for valuing hotel companies|author=Cederholm, Teresa|date=October 2014}}</ref> |
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Related to EBITDAR is "EBITDAL", "rent costs" being replaced by "lease costs". |
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}} |
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{{term|Earnings before interest, taxes, depreciation, amortization, and restructuring costs|'''Earnings before interest, taxes, depreciation, amortization, and restructuring costs''' ('''EBITDAR''')}} |
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{{defn| |
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Some companies use an EBITDAR where "R" indicates "restructuring costs". While this analysis of profits before restructuring costs is also helpful, such a metric should better be termed "adjusted [[EBITDA]]". |
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}} |
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{{glossary end}} |
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=== EBIDAX === |
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'''Earnings Before Interest, Depreciation, Amortization and Exploration''' ('''EBIDAX''') is a non-[[Generally Accepted Accounting Principles|GAAP]] metric that can be used to evaluate the financial strength or performance of oil, gas or mineral company.<ref>{{Cite news|url=https://www.investopedia.com/terms/e/ebidax.asp|title=Earnings Before Interest, Depreciation, Amortization and Exploration (EBIDAX)|date=June 28, 2010|work=Investopedia|access-date=February 12, 2018|language=en-US}}</ref> |
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Costs for exploration are varied by methods and costs. Removal of the exploration portion of the balance sheet allows for a better comparison between the energy companies. |
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=== OIBDA === |
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'''Operating income before depreciation and amortization''' ('''OIBDA''') refers to an income calculation made by adding [[depreciation]] and [[amortization (accounting)|amortization]] to [[operating income]]. |
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OIBDA differs from EBITDA because its starting point is operating income, not earnings. It does not, therefore, include non-operating income, which tends not to recur year after year. It includes only income gained from regular operations, ignoring items like FX changes or tax treatments. |
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Historically, OIBDA was created to exclude the impact of [[write-down]]s resulting from one-time charges, and to improve the optics for analysts comparing to previous period EBITDA. An example is the case of [[Time Warner]], who shifted to divisional OIBDA reporting subsequent to write downs and charges resulting from the company's merger into [[AOL]]. |
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=== EBITDAC === |
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'''Earnings before interest, taxes, depreciation, amortization, and coronavirus''' ('''EBITDAC''') is a non-[[Generally Accepted Accounting Principles|GAAP]] metric that has been introduced following the global [[COVID-19 pandemic]]. |
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EBITDAC is a special case of adjusted EBITDA. |
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On 13 May 2020, [[the Financial Times]] mentioned that German manufacturing group Schenck Process was the first European company to use the term in their quarterly reporting.<ref>{{Cite news|url=https://www.ft.com/content/5467518c-1b68-4712-9e74-e7cc949d8002 |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/5467518c-1b68-4712-9e74-e7cc949d8002 |archive-date=2022-12-10 |url-access=subscription|title=Pandemic spawns new reporting term 'ebitdac' to flatter books|date=May 13, 2020|work=The Financial Times|access-date=June 10, 2020|language=en-UK}}</ref> The company had added back €5.4m of first-quarter 2020 profits that it said it would have made were it not for the hit caused by 'missing |
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contribution margin and cost absorption reduced by direct financial state support received majorly in China so far'.<ref>{{Cite news|url=https://www.schenckprocess.com/investor-relations?pid=10 |
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|title=Investor Relations: Financial Reports 2020|date=May 12, 2020|work=Schenk Group GmbH|access-date=June 10, 2020|language=en-UK}}</ref> |
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Other companies picked up this EBITDAC measure as well, claiming the state-mandated lockdowns and disruptions to the supply chains distort their true profitability, and EBITDAC would show how much these companies believe they would have earned in the absence of the coronavirus. |
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Like other forms of adjusted EBITDA, this can be a useful tool to analyse companies but should not be used as the only tool. |
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==See also== |
==See also== |
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* [[Earnings |
* [[Earnings before interest and taxes]] (EBIT) |
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* [[Earnings before interest and taxes]] (EBIT), or operating profit |
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* [[EV/EBITDA]] |
* [[EV/EBITDA]] |
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* [[Gross profit]] |
* [[Gross profit]] |
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* |
* [[Net income]] |
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* [[ |
* [[Net profit]] |
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* [[Operating margin]] |
* [[Operating margin]] |
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* [[Owner earnings]] |
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* [[P/E ratio]] |
* [[P/E ratio]] |
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* [[Revenue]] |
* [[Revenue]] |
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==References== |
==References== |
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{{ |
{{Reflist}} |
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==Further reading== |
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* {{cite book |last1=McLaney |first1=Eddie |last2=Atrill |first2=Peter |year=2012 |title=Accounting: An Introduction |url=https://books.google.com/books?id=ZbOaBQAAQBAJ |location=Harlow, Eng.; New York |publisher=Pearson |edition=6th |isbn=9780273771838 |oclc=989363259}} |
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==External links== |
==External links== |
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*[http://www.investopedia.com/terms/e/ebitda.asp Investopedia definition of EBITDA] |
* [http://www.investopedia.com/terms/e/ebitda.asp Investopedia definition of EBITDA] |
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{{Private equity and venture capital}} |
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{{DEFAULTSORT:Earnings |
{{DEFAULTSORT:Earnings before interest, taxes, depreciation, and amortization (EBITDA)}} |
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[[Category:Generally Accepted Accounting Principles]] |
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[[Category:Fundamental analysis]] |
[[Category:Fundamental analysis]] |
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[[Category:Profit]] |
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[[Category:Private equity]] |
[[Category:Private equity]] |
This article needs additional citations for verification. Please help improve this articlebyadding citations to reliable sources. Unsourced material may be challenged and removed.
Find sources: "Earnings before interest, taxes, depreciation and amortization" – news · newspapers · books · scholar · JSTOR (August 2013) (Learn how and when to remove this message) |
Acompany's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA,[1] pronounced /iːbɪtˈdɑː/,[2] /əˈbɪtdɑː/,[3]or/ˈɛbɪtdɑː/[4]) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandated payments, and costs required to maintain its asset base. It is derived by subtracting from revenues all costs of the operating business (e.g. wages, costs of raw materials, services ...) but not decline in asset value, cost of borrowing, lease expenses, and obligations to governments.
Though often shown on an income statement, it is not considered part of the Generally Accepted Accounting Principles (GAAP) by the SEC,[5] and hence the SEC requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to net income.[6]
EBITDA is widely used when assessing the performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone, i.e. how much profit the business generates by providing the services, selling the goods etc. in the given time period. This type of analysis is useful to get a view of the profitability of the operating business alone, as the cost items ignored in the EBITDA computation are largely independent from the operating business: The interest payments depend on the financing structure of the company, the tax payments in the relevant jurisdictions as well as the interest payments, the depreciation on the asset base (and depreciation policy chosen), and the amortisation on takeover history with its effect on goodwill among others. EBITDA is widely used to measure the valuation of private and public companies (e.g. saying that a certain company trades at x times EBITDA, meaning that the company value as expressed through its stock price equates to x times its EBITDA). In its attempt to display EBITDA as a measure of the underlying profitability of the operating business, EBITDA is often adjusted for extraordinary expenses, i.e. expenses that the company believes do not occur on a regular basis. These adjustments can include bad debt expenses, any legal settlements paid, costs for acquisitions, charitable contributions and salaries of the owner or family members.[7][8] The resulting metric is called adjusted EBITDAorEBITDA before exceptionals.
A negative EBITDA indicates that a business has fundamental problems with profitability. A positive EBITDA, on the other hand, does not necessarily mean that the business generates cash. This is because the cash generation of a business depends on capital expenditures (needed to replace assets that have broken down), taxes, interest and movements in working capital as well as on EBITDA.
While being a useful metric, one should not rely on EBITDA alone when assessing the performance of a company. The biggest criticism of using EBITDA as a measure to assess company performance is that it ignores the need for capital expenditures in its assessment. However, capital expenditures are needed to maintain the asset base which in turn allows for generating EBITDA. Warren Buffett famously asked, "Does management think the tooth fairy pays for capital expenditures?".[6] A fix often employed is to assess a business on the metric EBITDA - Capital Expenditures.
EBITDA margin refers to EBITDA divided by total revenue (or "total output", "output" differing from "revenue" according to changes in inventory).[9]
Revenue | $20,000 |
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Cost of goods sold | $8,000 |
Gross Profit | $12,000 |
Selling, general and administrative expenses | $7,000 |
Earnings before interest, taxes, depreciation and amortisation (EBITDA) | $5,000 |
Depreciation and amortisation | $1,500 |
Earnings before Interest and taxes (EBIT) | $3,500 |
Interest expenses and income | $300 |
Earnings before income taxes (EBT) | $3,200 |
Income taxes | $1,000 |
Earnings after tax (EAT) or Net income | $2,200 |
Earnings before interest, taxes, and amortization (EBITA) is derived from EBITDA by subtracting Depreciation.[10]
EBITA is used to include effects of the asset base in the assessment of the profitability of a business. In that, it is a better metric than EBITDA, but has not found widespread adoption.
Earnings Before Interest, Depreciation, Amortization and Exploration (EBIDAX) is a non-GAAP metric that can be used to evaluate the financial strength or performance of oil, gas or mineral company.[12]
Costs for exploration are varied by methods and costs. Removal of the exploration portion of the balance sheet allows for a better comparison between the energy companies.
Operating income before depreciation and amortization (OIBDA) refers to an income calculation made by adding depreciation and amortizationtooperating income.
OIBDA differs from EBITDA because its starting point is operating income, not earnings. It does not, therefore, include non-operating income, which tends not to recur year after year. It includes only income gained from regular operations, ignoring items like FX changes or tax treatments.
Historically, OIBDA was created to exclude the impact of write-downs resulting from one-time charges, and to improve the optics for analysts comparing to previous period EBITDA. An example is the case of Time Warner, who shifted to divisional OIBDA reporting subsequent to write downs and charges resulting from the company's merger into AOL.
Earnings before interest, taxes, depreciation, amortization, and coronavirus (EBITDAC) is a non-GAAP metric that has been introduced following the global COVID-19 pandemic.
EBITDAC is a special case of adjusted EBITDA.
On 13 May 2020, the Financial Times mentioned that German manufacturing group Schenck Process was the first European company to use the term in their quarterly reporting.[13] The company had added back €5.4m of first-quarter 2020 profits that it said it would have made were it not for the hit caused by 'missing contribution margin and cost absorption reduced by direct financial state support received majorly in China so far'.[14]
Other companies picked up this EBITDAC measure as well, claiming the state-mandated lockdowns and disruptions to the supply chains distort their true profitability, and EBITDAC would show how much these companies believe they would have earned in the absence of the coronavirus.
Like other forms of adjusted EBITDA, this can be a useful tool to analyse companies but should not be used as the only tool.
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