In this article, we are going to see what EBITDA is and how it is calculated.
EBITDA (Earnings Before Interests, Taxes, Depreciations and Amortizations) refers to the earnings of the companies before interest, taxes, depreciation and amortization. It would be the gross operating profit calculated before deducting financial expenses.
Although it is not part of the company’s income statement, it is a widely used indicator as a reference on activity, since it constitutes an approximate indicator of a company’s ability to generate profits considering only its productive activity.
But it must be borne in mind that it does not measure the liquidity of the company, since although it includes provisions and amortizations, it does not take into account other cash outflows such as financial payments or sales and purchases that have not yet been made effective.
It is the financing of startups and small companies by investors who believe in their long-term growth potential. Since startups lack access to capital markets, borrowing is very difficult. Venture capital today enables these small businesses to receive the necessary financing.
How it is calculated?
- EBIT (Earnings Before Interest and Taxes): gross profit or operating result, that is, the profit before deducting taxes and interest. This is the formula:
- EBIT = Sales – Costs – Operating expenses
- To calculate EBITDA we must add to EBIT the expenses and provisions of the company corresponding to depreciation and amortization. The formula would look like this:
- EBITDA = EBIT + depreciation expense + amortization expense.
Therefore, EBITDA, by itself, says nothing about the true financial situation of the company. Because depreciation and amortization are added, it approximates the concept of operating cash flow.
The information we obtain from this item allows us to compare companies in the same sector, to decide which would be more and which of them has the greatest capacity to generate profits.
EBITDA is a very popular ratio because it shows the company’s earnings without deducting certain expenses. Therefore, it gives the impression that profits are higher, showing more profits than the operating result shows. And that entrepreneurs like a lot.