EBITDA
Full form: Earnings Before Interest, Taxes, Depreciation and Amortisation
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It is a company's profit from its core operations before the costs of financing, tax and the wearing down of assets are taken out. It is often used to compare the operating strength of different businesses.
The formula
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation. A quicker way to the same figure is revenue minus the cost of running the business, before those four items. Depreciation and amortisation are accounting charges that spread the cost of machinery and other assets over their working life. They are not cash leaving the company that year.
Why people use it
Two companies can look different only because one has borrowed more, pays different tax, or bought its equipment at a different time. EBITDA takes those out, so it shows what the operations themselves earn. Dividing EBITDA by revenue gives the EBITDA margin, which says how much of each rupee of sales is left from operations.
What it leaves out
EBITDA is not cash flow and not net profit. It ignores the money a company must keep spending on machinery and equipment, and it ignores interest on debt, which is a real cost to the owners. A company can have a healthy EBITDA and still be strained by heavy debt.
Adjusted EBITDA
Some companies publish an adjusted figure that removes further items they call one-off. Treat it with care, because the company chooses what to remove. Compare it with the plain figure in the profit and loss statement.
From net profit to EBITDA (hypothetical numbers)
Suppose a company has net profit of ₹60 crore, interest of ₹15 crore, tax of ₹20 crore, and depreciation and amortisation of ₹25 crore. EBITDA = 60 + 15 + 20 + 25 = ₹120 crore. If its revenue is ₹600 crore, the EBITDA margin is 120 divided by 600, which is 20 percent.
Common questions
- What is the full form of EBITDA?
- Earnings Before Interest, Taxes, Depreciation and Amortisation.
- Is EBITDA the same as net profit?
- No. EBITDA is before interest, tax, depreciation and amortisation. Net profit is what is left after all of them.
- What is the EBITDA margin?
- EBITDA divided by revenue, shown as a percentage. It shows how much of each rupee of sales is left from operations.
- Does a high EBITDA mean a company is healthy?
- Not by itself. It ignores interest on debt and the spending needed to keep assets running.