Understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Ammortization) – a crucial metric for assessing operating profit. Learn the formula, usage in comparison, and how to calculate EBITDA Margin. Dive into an example to grasp its practical application and importance for evaluating business performance.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Ammortization.
EBITDA = E+I+T+D+A
E – Earnings
I – Interest
T – Taxes
D – Depreciation
A – Ammortization
It is a measure of the operating profit of a business, which is the profit before giving the effect of any debt, statutory obligations and costs incurred to maintain the fixed assets. The emphasis is more on the firm’s operating decisions.
EBITDA Margin is the relation between an entity’s operating profits vis a vis its turnover/revenue. This margin indicates how much cash profit the entity can generate.
The EBITDA Calculation can be useful while making comparison of the business with a contemporary.
A Higher EBITDA Margin indicates that the entity has a high growth potential.
EBITDA Margin = EBITDA/Net Revenue
It is to be noted that only interest on debts is to be considered. Any other interest such as interest on income tax should not be considered.
Babu Bhaiya Corporate Limited has a Net Profit of Rs. 1,00,000. Its interest on debt amounts to Rs. 20,000. Income Tax computed is Rs. 10,000. Total Depreciation amounts to Rs. 30,000. And the net revenue amounts to Rs. 5,00,000. What is the EBITDA and the EBITDA Margin?
Ans: EBITDA = 1,00,000+20,000+10,000+30,000 = Rs. 1,60,000
EBITDA Margin = 1,60,000/5,00,000 = 32%
Suppose there is another company called Raju Fund Corporate Limited, which is into the similar domain as of Babu Bhaiya. Its EBITDA Margin is 30%.
Since the EBITDA of Babu Bhaiya is marginally higher, it would be considered that it has a better growth potential and is better performing than Raju Funds.