EBITDA - what is it? How to calculate the analytical indicator?

There are many different indicators for assessing the financial performance of the company. Some of them are generally accepted, not only in our country, but throughout the world. EBITDA can be classified as such. What is this indicator, how is it calculated and for what? In this article, we will look in detail at how the company's financial results are evaluated based on EBITDA values, and for what purposes they are used.

EBITDA: decoding and meaning

It should immediately be noted that this analytical indicator is not part of accounting. And its original purpose is to evaluate the attractiveness of a company from the point of view of its absorption into borrowed funds. How is the analysis done? First, EBITDA is determined, the calculation of which is based on the financial statements of the enterprise. Then the obtained indicator is compared with industry analogs, as a result of which the effectiveness of the activity of this particular company is revealed.

In order to understand how the comparison takes place, it is necessary to decipher the value of EBITDA. What is this indicator, and what information does it give about the enterprise? The term stands for Earnings before Interest, Taxes, Depreciation and Amortization. If you translate literally, then this is profit before interest on loans, taxes and depreciation. That is, the company's ability to earn money, regardless of whether it has debts to creditors, the state and the depreciation method used, is assessed. Direct profitability of the main activity is directly determined, which makes it possible to analyze it "unbiased".

Calculation of EBITDA according to international standards

Since this indicator is used all over the world, then the basis for its calculation should serve as reporting data, corresponding to IFRS. Specifically, the following values will be needed to determine the EBITDA ratio:

• Net profit (remaining after payment of taxes and other payments to the budget);
• Expenses on income tax;
• Amount of the reimbursed profit tax;
• Extraordinary incomes and expenses;
• Interest paid and received;
• The amount of depreciation deductions (for both tangible and intangible assets);
• Revaluation of assets.

The first five indicators form EBIT, or operating profit. It is defined as the difference between gross profit and expenses for the ordinary activities of the enterprise and is the basis for calculating EBITDA. The EBIT calculation formula looks like this:

• Net profit + tax expense - refundable tax + through. Expenses - through. Income +% paid -% received.

As a result, we get an intermediate indicator between gross and net profits. This is a profit that would be received by a company that does not use borrowed funds. It includes all income from sales and other income, as well as expenses (including depreciation charges).

EBIT and EBITDA

The EBIT indicator should be at least positive. Knowing it, you can calculate the EBITDA value. The calculation formula has the following form:

• EBIT + depreciation for MA and NMA - revaluation of assets.

Thus, we get a profitability index of the company before taxes, interest on loans and depreciation expenses in accordance with world standards. By eliminating such non-monetary items (which can be called a kind of formal accounting accruals), EBITDA becomes more approximate to the operating cash flow.

EBITDA in the history of the economy

As already mentioned, earlier this indicator was intended for analysis of the ability of the enterprise to service borrowed funds (or debts). Lenders could assess the EBITDA values of various companies in the industry and on their basis determine the amount of interest payments that each of them can provide in the near future. The indicator was very interesting for credit Raiders, who were looking for suitable companies to derive benefits. The enterprise was considered, rather, not as a subject of the economy, but as a set of assets that can be sold successfully. To do this, all the articles that could potentially be aimed at paying off the debt were summed up. At the same time, if all of the net profit went to pay the debt, and the business as a result became unprofitable, then the tax expenses could be considered as an additional basis for settling debts. Naturally, for the company itself, this became an insurmountable problem - all its funds were withdrawn, and as a result, activities had to be stopped. But the creditors remained in positive territory. This made EBITDA particularly popular in the 1980s, when there was a fever of buying out / borrowing for borrowed funds.

EBITDA in the modern financial activities of companies

Today, this indicator is the third in a series of tools to assess the performance of the 500 largest corporations in America and is necessarily included in their annual financial statements. It shows the total revenue that the company will bring in the current reporting period. In addition, EBITDA is calculated on its basis.

The most important interest of the investor is the future income of the enterprise in which he plans to invest, which means that the size of EBITDA is important to him. Knowing it, you can determine the return on investment. The formula looks like this:

• EBITDA: sales revenue.

On the basis of the values obtained, the potential of companies with different structures but operating in the same industry is compared. For investors, this indicator is an important indicator of the return of their investments.

Benefits of

Why are many companies, especially large ones, interested in calculating the EBITDA indicator? What does this give them? It is very simple to explain the interest in this profitability assessment tool. Enterprises that have a sufficiently large amount of capital expenditure, get an opportunity to present their business in the most favorable light, rather than on the basis of standard reporting. Attention of investors is focused on the value of EBITDA, which can significantly exceed the size of real profit, calculated taking into account the advance costs. But in some enterprises the share of depreciation can reach 30% of the cost of production (steelmaking, cable TV, etc.).

Despite the fact that using this indicator, business often looks stronger than "its" real cash flow, many analysts today pay much more attention to it. This, however, is justified. After all, based on EBITDA, it is possible to assess the company's ability to service its obligations and reinvest funds for future business development.

Comparison of companies by EBITDA

This indicator is widely used to determine the place of an enterprise in the industry. For this, a comparative estimate is made. It includes two mandatory components:

• Calculation of business value (in a comparative form, for which prices are converted into profit multipliers, sales volumes and book value) ;
• Comparison with comparable enterprises in the industry.

Thus, the company is evaluated in the financial market. It is simply compared to another similar business, whose shares are quoted in the same industry segment. EBITDA is in demand by most public companies and is necessarily present in the statements prepared for potential investors.

Conclusion

It can be concluded that the indicator considered by us is one of the most important for both the companies themselves and for investors. We found out why the EBITDA coefficient is of interest to all of them, that this gives the business owners themselves and those who are interested in investing in it. For the first, this is an opportunity to present your company in a favorable light, for the latter it is a way to estimate the potential income that can be obtained from investing in its activities.