EBITDA CALCULATOR

 

 

 
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EBITDA calculator

While looking at a company’s finances, you may have come across something called EBITDA. What is EBITDA, and why is it important? EBITDA is crucial as it gives you a good idea of a company’s performance after discounting financial, account, and tax issues. EBITDA is simply earnings before interest, tax, depreciation, and amortisation. The EBITDA margin is the ratio of EBITDA to revenue or EBIDTA divided by revenue. You can use an EBITDA calculator or EBIDTA margin calculator online to determine a company’s health.

EBITDA is one of the many metrics used to measure company's financial performance to form investment decisions. EBITDA gives a clearer picture and often used in place of net income. Even though companies are not required to publish EBITDA number, one can still calculate it easily from available financial statements. Because it is convenient and easy to understand, analysts and investors widely use EBITDA to evaluate a company's worth during investing.

EBITDA IS
 

Analysts also calculated EBITDA margin, which offers deeper insight into company's profitability. EBITDA margin calculates EBITDA to revenue. It indicates how much company's operational expenses are eating into its profit. The higher value of EBITDA margin indicates financial stability and lower risk.

EBITDA margin calculation is essential because it gives you a clearer picture of a company’s operating profitability and cash flow. It’s used a lot during mergers and acquisitions as it shows a clearer picture of performance across industries and sizes.

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How to calculate EBITDA?

EBITDA removes exclusions to give a better idea of company's operational efficiency. The formula used for measuring EBITDA is the following.

EBITDA = Net income + interest expenses + tax + depreciation + amortization

The easiest way is to use an EBITDA calculator online. It can also be done manually. If a company has revenues worth Rs 75 lakh, an operating profit of Rs 10 lakh, depreciation expenses of Rs 2 lakh, amortisation expense of Rs 1 lakh, and pays taxes worth Rs 1 lakh, the EBIDTA would be Rs 10 lakh minus (2+1+1), or Rs 6 lakh. Dividing EBIDTA by revenues would give you the EBIDTA margin, which in this case is 8 per cent.

EBITDA margin in useful metrics that gives critical insight into company's performance. let's see how EBITDA margin helps in comparing companies against industry standards.

Company A is financed by debt and incurred interest expense at the rate of 10 percent.

The easiest way is to use an EBITDA calculator online. It can also be done manually. If a company has revenues worth Rs 75 lakh, an operating profit of Rs 10 lakh, depreciation expenses of Rs 2 lakh, amortisation expense of Rs 1 lakh, and pays taxes worth Rs 1 lakh, the EBIDTA would be Rs 10 lakh minus (2+1+1), or Rs 6 lakh. Dividing EBIDTA by revenues would give you the EBIDTA margin, which in this case is 8 per cent.

Areas of Evaluation Company A Company B
Revenue Rs 500,000 Rs 500,000
Amount of subscriptions sold Rs 200,000 Rs 200,000
Interest expenses incurred  Rs 20000 (@ 10 percent on Rs 200,000) Nil
Depreciation  Rs 1000 Rs 1000
Income (before tax) Rs 290,000 Rs 310,000
Net income (at 30% tax rate) 203,000 217,000
EBITDA 311000 311,000

Company A is paying Rs 2000 interest on debt, which makes them look less profitable compared to company B which shows higher income on income statement. But when we apply EBITDA formula, both companies end up with the same margin.

If an investor looks only at the income statement, company B looks like a better bet as it has a higher income. but in terms of EBITDA, both the companies are in equal footing. It is only the interest payment, that is skewing the values for Company A.

Understanding EBITDA margin

Once you get the idea of EBITDA, using it, you can calculate EBITDA margin. Like EBITDA, EBITDA margin is also useful in understanding the operational profitability of a company. A high EBITDA percentage signifies lower operating expenses and higher earnings. It shows that the company can meet all its operating expenses and still retain a decent amount of earning.

With this understanding, let's see what the industry considers as good EBITDA margin. EBITDA margin varies between industries, but most sectors consider 60 percent as good EBITDA margin.

Analysts calculate EBITDA margin over a period to see if it is increasing, decreasing or remaining stable to make a fair understanding of the company's changing financials.

Why is EBITDA margin important for businesses?

If you are planning to get investors for your business or trying to sell, the EBITDA margin is a crucial measurement of your company's profitability. It tells investors if the company is capable to generate good profit without considering variables like interest payment, asset depreciation, taxes, and any other cost that you may be incurring. It strips away the variables impacting your operational profitability so investors can compare it against other firms from the industry.

As you can see in the above example, the income of company A is less than company B. But when we excluded interest payment, both had the same EBITDA margin. If investors compare company A with company B, company A will look poor even when they both have the same revenue. EBITDA margin takes away the biases and presents a valuation that is not impacted by external factors.

Despite its advantages, EBITDA margin isn't free from faults. Some companies manipulate EBITDA data to look profitable. Companies with large debt often emphasise EBITDA since it doesn't take into consideration debt payment. While it removes external factors that impact the company's performance, EBITDA margin is also responsible for causing peripheral blindness and may make a highly indebted company look profitable.

Like with any other method, relying heavily on EBITDA may skew the picture. It is good to apply various methods that can give you clarity regarding the company's health.

Limitations of EBITDA

Despite being an effective measure of company’s operational efficiency, EBITA offers limited visibility to company’s actual strength, which is important for future investors. As a better measure, look into company’s fundamentals and industry performance as a whole to decide the future course of action. Usually, companies with EBITDA margin close to the industry average or slightly above are better options to put your money in.

EBITDA vs Net Income

EBITDA and Net Income both are metrics to judge a company’s efficiency in generating operational profit. In contrast to net income, EBITA measures of net cash flow after excluding the impact of external factors like tax, interest payment, depreciation, and amortisation.
EBITDA, as you have guessed, is Earning before Interest Tax Depreciation and Amortisation. So the equation used in calculating EBITDA is following.

EBITA = Net Income +Taxes + Interest Expenses + Depreciation + Amortisation

EBITDA is used to compare the profitability of different companies from a sector while making an investment decision. On the other hand, net income is the company’s earnings after deducting non-operational expenses. In other words, it is a measurement of a company’s net profit, stated in the financial statement. Some companies report EBITDA because it minimises the impact of external factors beyond the scope of control of them.

However, there are both pros and cons of using EBITDA like the following.

  • EBITDA helps you compare the earning efficiency of companies and industries, separate from external influences. The company with a higher EBITDA makes an attractive investment option
  • EBITDA calculates net profit of the company before non-operational expenses, while net income measure earning per share
  • Since EBITDA doesn’t take into account all aspects of a business, it might overstate cash flow
  • Investors must keep in mind that companies may use EBITDA to inflate their profitability

The Bottom Line
Investors mustn’t consider EBITDA alone. There are several other metrics like cash flow, which is the company’s llifeblood and gives a better measure of its viability.

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