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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.
While EBITDA often appears on the non-GAAP financials of a company, such as management presentations, press releases, and equity research reports, EBITDA is not permitted to be recognized on the income statement.[5]
Contrary to profitability metrics like operating income (EBIT) and net income, EBITDA is not considered part of the Generally Accepted Accounting Principles (GAAP) by the SEC,[6] and hence the SEC requires that companies registering securities with it (and when filing its periodic reports) reconcile EBITDA to net income.[7]
EBITDA is widely used when assessing the operating performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone. In other words, EBITDA is the operating profit of a company in the given time period, after adjusting for non-cash expenses and non-recurring items (or extraordinary items).
This type of analysis is useful to get a view of the profitability of the operating business alone, as the costs and expenses excluded in the EBITDA computation are largely independent from the operating business.
The EBITDA metric excludes interest and taxes, while adding back non-cash items, such as depreciation and amortization (D&A).
Note that not all intangible assets can be amortized, such as goodwill (the excess paid over the fair value of an asset in M&A), 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).
EBITDA is often adjusted for extraordinary expenses, i.e. expenses that the company believes do not occur on a regular basis. The most common adjustments include goodwill impairment, inventory write-down (or write-off), bad debt expenses, legal settlements, restructuring costs, transaction fees paid to investment banks, charitable contributions and salaries of the owner or family members.[9][10] The resulting metric is called adjusted EBITDAorEBITDA before exceptionals.
A negative EBITDA indicates a business has fundamental problems with profitability. A positive EBITDA, on the other hand, does not necessarily mean that the business generates positive free cash flow (FCF). This is because the cash generation of a business depends on capital expenditures (i.e. the purchase of fixed assets to drive growth or spending to replace assets that have broken down), taxes, interest and changes in working capital line item.
While a useful metric to analyze profitability, 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?".[7] A fix often employed is to assess a business on the metric EBITDA - Capital Expenditures.
EBITDA can either be calculated starting from operating income (EBIT), or net income.
If starting from operating income, or EBIT, the next step is to add back non-cash expenses, like D&A.[11]
If starting from net income (NI), the adjustments applied include adding back taxes and interest, followed by adjusting for non-cash items.
The depreciation and amortization expense is recorded on the cash flow statement (CFS).
EBITDA margin refers to EBITDA divided by total revenue (or "total output", "output" differing from "revenue" according to changes in inventory).[12]
Revenue | $20,000 |
---|---|
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.[13]
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.[15]
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.[16] 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'.[17]
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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