The term ebitda. Review material: What is EBITDA

EBITDA (Earnings before interest, taxes, depreciation and amortization) is earnings before interest, taxes, depreciation and amortization. The EBITDA calculation is used to measure a company's operating profitability because it only takes into account those expenses that are necessary to run the business on a "day-to-day basis." However, because of its flexibility, a significant difficulty arises when using EBITDA as a measure of profitability: since the calculation of EBITDA on the balance sheet is not officially regulated, companies can manipulate this indicator, making the business appear more profitable than it actually is.

To analyze a company's financial health and gain a complete picture of its profitability, corporate financiers and investors carefully study financial statements and balance sheets. In this process, a number of indicators and related financial ratios are used to measure profitability. Typically, analysts consider standardized measures of profitability as set forth in generally accepted accounting principles—GAAP and IFRS—because they are easily comparable across businesses and industries. At the same time, there are indicators that are not related to them, but are also widely used in practice. One of them is EBITDA.

For example, the calculation uses only operating income as the source of income. With this definition of profit, EBITDA is most closely related to operating profit. At least in theory, excluding asset depreciation expense is the only real difference between the two figures. Since operating profit appears on a company's income statement, the easiest way to calculate EBITDA is to start with the GAAP/IFRS number and work backwards (EBITDA Calculation Formula 1)

EBITDA = Operating profit + Depreciation and amortization expense

Example of EBITDA calculation

For example, for the fiscal quarter ended June 30, 2017, the company had operating income of $128.79 million and depreciation and amortization expense of $29.05 million. The above formula for calculating EBITDA in this case will give the following result:

$128.79 million + $29.05 million = $157.84 million

However, many companies interpret the name of this indicator literally, including all expenses and sources of income, regardless of their relationship to core operations. Under this method, EBITDA is calculated based on net income and the write-off of taxes, interest and amortization. This calculation formula allows you to include in profit any additional income from investments or secondary transactions, as well as one-time payments for the sale of an asset. (EBITDA calculation formula 2):

EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization

Using the example above, in addition to depreciation expense, the company has net income of $70.28 million, taxes of $56.43 million, and $2.08 million in interest. payments for the quarter. Using this calculation model, EBITDA for the same fiscal quarter would be:

$70.28 million + $2.08 million + $56.43 million + $29.05 million = $157.84 million.

It is worth noting that EBITDA formulas may produce different results. Differences in EBITDA calculations may be explained by the sale of large quantities of equipment or high investment returns, but if these parameters are not explicitly stated, the result can be misleading. An unscrupulous company could easily use one calculation method this year and switch to another the next year to overestimate its performance. If the calculation method remains the same from year to year, EBITDA will be very useful for comparing historical performance.

The difference between operating margin and EBITDA

Operating margin and EBITDA are two measures of a company's profitability. Although they are related, they show different measures of profit and different points of financial analysis for a company.

Operating margin, also called operating profit margin, is one measure of a company's profit level. It is calculated as a percentage of total sales revenue, with all costs of doing business taken into account in the formula, excluding taxes, interest, investment gains or losses, and any gains or losses from events outside the company's normal business operations, such as sale of real estate, buildings, etc. Costs involved in calculating operating margin include wages and benefits for employees and independent contractors, administrative expenses, the cost of parts or materials needed to produce the goods sold by the company, advertising expenses, and depreciation. Calculating operating margin helps companies analyze and reduce the variable costs associated with running their business.

Although the metrics used to calculate operating margin and EBITDA overlap somewhat, EBITDA is generally considered to be more closely related to net income because net income provides the base amount from which EBITDA is calculated. Net income is a rough estimate of a company's profitability because it includes all of the company's costs and expenses, taxes, interest, one-time or extraordinary expenses, and amounts that are not included in the calculation of operating income. EBITDA is the sum of net income with taxes, interest, depreciation, and amortization added to that sum. Thus, EBITDA includes both measures that are typically classified under net income (taxes and interest) and a measure that is typically classified under operating income (depreciation and amortization).

EBITDA margin and risks of using EBITDA when evaluating investments

When making an investment decision, there are two specific risks if an investor relies on EBITDA margin data:

• EBITDA margin is not a good indicator of the performance of companies with expensive equipment or equipment purchased on debt;
• EBITDA margin can hide the fact that some companies have high EBITDA but low net income and profitability.

EBITDA margin measures a company's earnings before interest, taxes, depreciation, and amortization as a percentage of its total revenue. EBITDA margin can be calculated as follows:

EBITDA margin = EBITDA/total revenue

For investors, EBITDA margin is a good way to evaluate the potential of a planned investment, as it provides insight into a company's performance without taking into account financial decisions, accounting decisions and many tax conditions. EBITDA margin can also provide investors with greater insight than a company's profitability metrics. EBITDA margin does not include non-operating consequences of the company's activities such as depreciation, taxes and interest payments.

Although EBITDA is of some interest to investors, it has a number of disadvantages as the main argument in decision making. For example, companies operating in industries that require large amounts of fixed assets, such as manufacturing, will not provide investors with accurate EBITDA margin performance metrics. Property, plant and equipment, typically purchased on credit, have interest payments that are not included in EBITDA and high depreciation, which is also not included in EBITDA. While EBITDA is a useful performance indicator, it does not take into account the company's net income, which can be very low to an investor and signal that the investment will be underperforming.

Thus, EBITDA is useful for comparing the net profitability of different companies for financing and accounting decisions. But when using this indicator, investors need to take into account the presence of certain risks.

The level of development of economic science in the West is head and shoulders above that in Russia. Therefore, it is not surprising that the Russian language has occupied a whole host of English-language terms that remain a mystery to the average person. That's why it's so important to explain what EBITDA is in simple terms.

Enterprise performance indicators

For proper planning and monitoring of the current state of the enterprise, it is imperative to know all the most important indicators of the effectiveness of its activities:

• Net profit;
• Liquidity;
• Profitability - capital, assets, turnover;
• Cost price;
• Overhead costs.

The above indicators are used by the following market players:

• Investors - for the correct choice of investment object;
• Creditors - to assess the likelihood of repayment of borrowed funds;
• The management of the enterprise to develop a long-term strategy;
• Financial managers to assess the correctness of management decisions.

What is net profit?

Net profit is the share of revenue that ends up in the hands of the owners of the enterprise as soon as all necessary payments have been made.

Not only the welfare of shareholders, but also the fate of the enterprise itself depends on the amount of net profit. It is from this money that funds go towards:

• Investment in production (purchase of new technologies, hiring highly qualified labor, purchasing expensive equipment, etc.);
• Dividends to shareholders;
• For social needs;
• Savings for unforeseen situations;
• Material incentives for staff;
• Unallocated balance.

The exclusive right to distribute profits belongs to the owners of the company, who draw up a special protocol for this. It is prohibited to manipulate money in circumvention of this document.

Methods for calculating net profit

In the domestic practice of economic analysis, the following methods for calculating the amount of net profit have developed:

1. In general, PE is calculated as the difference between the revenue indicator and expenses, which includes cost, taxes and other mandatory expenses, when combining the value of other income: PE = B - SS + PD - PR - N. The other income indicator is the gain from the difference in exchange rates currencies, income from rental of production workshops, etc.;
2. Simplified formula: the difference between the profit on the balance sheet and tax deductions;
3. In the balance sheet lines, the value of this indicator is calculated as follows: line 2110 - (line 2120 + line 2210 + line 2220) + line 2340 - line 2350 - line 2410. As a rule, enterprises themselves indicate the amount of net profit in line 2400 upon annual submission of financial statements to the State Statistics Committee.

One of the quantities that indirectly speaks about the profitability of the enterprise and the amount of net profit, is EBITDA.

EBITDA: what is it and how to calculate it?

EBITDA literally stands for in English as Earnings before interest, taxes, depreciation and amortization, which can be roughly translated as “ the amount of income of an enterprise before payments of interest [on the loan], taxes, depreciation and amortization have been made" That is, this is the one the share of gross profit that remains in the company's accounts from operating activities.

This value clearly indicates the organization’s ability to generate income, regardless of whether or not it has obligations to the state, creditors or other firms.

Thus, the structure of the value called EBITDA includes the following indicators:

• Net profit;
• Expenses for loan payments or dividends to shareholders;
• Duties and NNP;
• Depreciation expenses.

This indicator was first used in the 80s of the last century when predicting the possibility of mergers or acquisitions of enterprises and assessing their financial stability. It began to be used in Russian practice relatively recently.

As for pronunciation, English speakers prefer the variant “e-bit-di-ey”. In our country, a tradition has developed of letter-by-letter transcription of the term as EBIDTA and even the phonetically strange EBIDTA with an emphasis on the second syllable.

Advantages of the technique

EBITDA strengths include:

• Benefit for use by those enterprises that are characterized by a high depreciation rate (up to a third of the cost);
• Like net profit, this value gives a very realistic idea of ​​the company’s ability to invest and service obligations;
• This is an ideal tool for comparing two companies that belong to the same sector of the national economy. It is especially popular among joint stock companies whose shares are listed on the stock exchange, and is certainly included in the reporting;
• A potential investor can, using this indicator, with a high degree of probability, calculate the level of his future income;
• EBITDA is great for analyzing the performance of a young company that is growing at a very fast pace;
• Analysts also often use this technique to evaluate companies that were purchased with borrowed money.

Disadvantages of EBIDTA

Over almost forty years of its use, this indicator has earned both loyal supporters and irreconcilable opponents. Among the errors of the methodology are:

• The EBIDTA indicator is not taken into account in any way by government agencies that write accounting standards. Therefore, often different researchers and even different companies mean completely different things by this acronym;
• There is no equity investment in the formula, which makes EBITDA a highly unrealistic tool in many cases. For example, large capital investments by high-tech enterprises, transport or construction firms may simply be ignored;
• As follows from the previous paragraph, the technique often makes it possible to present the almost unprofitable state of many companies in an advantageous light, which is taken advantage of by unscrupulous businessmen;
• The indicator says little about the movement of cash flows, such as various types of fixed costs, working capital and payments to creditors;
• In Russia, this indicator is used quite rarely, including due to the lack of required information. Therefore, a truncated formula is used: the difference between profit from sales and depreciation charges. Accordingly, it has a very distant relationship with the formula used in the West.

So, what is EBITDA in simple terms? This is an indicator of enterprise profitability, used to evaluate the performance of companies, especially publicly traded ones. However, in the domestic school of economic analysis its use is extremely limited.

During periods of publication of company reports, investors pay special attention to not only classic indicators - net profit, revenue, company debt (both short-term and long-term), but also a number of “synthetic” indicators that are not directly present in reporting under IFRS (international standards). financial statements), nor in RAS (Russian accounting standards). One of them is EBITDA (Earnings before interest, taxes, depreciation and amortization) - earnings before interest, taxes, depreciation and amortization. In this article we will explain in simple language what EBITDA is, how to calculate this indicator, why it is needed and how it differs from the classic reporting components.

EBITDA calculation

To better understand the meaning of EBITDA, let's get acquainted with the methodology for calculating it. To calculate the EBITDA ratio, we will need “Earnings before taxes” (present in the Profit/Loss Statement), as well as “Depreciation and Amortization”, “Interest Earned” and “Interest Paid” (these indicators are present in the Cash Flow Statement). Traditionally, IFRS statements are used to calculate EBITDA. In fact, the formula for calculating EBITDA is as follows: from the sum of “Earnings before taxes”, “Depreciation and amortization” and “interest paid”, subtract “interest received”.

As an example of calculating EBITDA, let's take the indicators of the Rosneft company for 2016. From the annual report according to IFRS, we consider the “Profit and Loss Statement” and take the value of profit “before tax” - 317 billion rubles.

Rice. 1. Profit before tax of Rosneft for 2016

Next, we move to the cash flow statement, which consists of sections for the company’s operating, financial and investing activities. From the report on operating activities we take the indicator “Depreciation and amortization” - 482 billion rubles. and sum it up with “Profit before tax” - 317 billion rubles, and then subtract “Interest received” 58 billion rubles, thereby getting 741 billion rubles.

Rice. 2. Cash flow statement of Rosneft for 2016

Next, look at the section on “Financial activities”, in which we take the indicator “Interest paid” - 143 billion rubles, to which we add the received 741 billion rubles. It turns out that the final EBITDA value of Rosneft for 2016 is 884 billion rubles.

Rice. 3. Cash flow statement of the Rosneft company for 2016 section Financial activities

The meaning of EBITDA and its differences from classical reporting indicators

In the course of its activities, the company receives a certain revenue (RUB 4,887 billion in our example), the dynamics of which is a measure of the company’s expansion in its industry. Revenue is usually the largest figure on an income statement, and when you subtract costs, taxes, and other factors from it, you get the net profit that everyone so desires. But one indicator of net profit cannot reflect the real state of affairs in the company - since the company could, say, accumulate cash for three quarters in a row, and in the fourth spend it on paying off debt, thereby significantly reducing net profit. But EBITDA adds up the interest that was paid to the pre-tax profit. In simple terms, EBITDA shows how much cash a company can generate before paying taxes, interest, and depreciation and amortization, which is particularly high and a big drag on net income in capital-intensive industries (like the oil industry). Thus, the financial indicator EBITDA is less volatile than net income, but at the same time it is net of cost of sales, selling and administrative expenses, as well as other income and expenses. Traditionally, EBITDA is slightly less than revenue, but more than net profit.

EBITDA is used to calculate multiples, where the indicator usually replaces net income to provide less volatile data that can still reflect the company's cash generation. This indicator is also used to calculate the “EBITDA Margin”, which is equal to EBITDA/sales revenue.

In addition, EBITDA is used as a starting indicator of the company's value, assuming that the company can be sold for 10 EBITDA. But this, of course, is a very rough, approximate assessment.

Conclusion

Not all necessary indicators are present in the company's reporting - for example, EBITDA should either be calculated independently or obtained from additional sources. Moreover, the reporting organization itself often additionally calculates EBITDA, understanding the degree of investor interest in it. Naturally, EBITDA is characterized not only by its value, but also by its dynamics. In addition, this indicator should be understood in conjunction with others, comparing their dynamics with other companies in the industry, in order to identify the most interesting from an investment point of view.

We tried to explain to you in simple words what EBITDA is. Want more information? Register on the Otkritie Broker portal - we will help you understand all the intricacies of working with financial multipliers!

The EBITDA indicator itself shows the profit (loss) of the company before the specified payments. And its profitability characterizes the share of EBITDA in revenue; the ratio reflects the profitability (loss ratio) of the company before interest, taxes and depreciation.

EBITDA margin can be used to compare the performance of several firms from different countries and with different capital structures, but operating in the same industry.

Calculation formula (according to reporting)

If you see any inaccuracy or typo, please also indicate this in the comment. I try to write as simply as possible, but if something is still not clear, questions and clarifications can be written in the comments to any article on the site.

Best regards, Alexander Krylov,

The financial analysis:

• Definition Earnings before interest, taxes, depreciation and amortization (EBITDA) is profit (loss)…
• Definition of Operating Income Before Depreciation and Amortization (OIBDA) (operating income before depreciation of fixed assets and intangible assets or operating income before depreciation) -…
• Definition Profitability of core activities is the ratio of profit (loss) from sales to revenue. The indicator characterizes the share of profit (loss) received by the organization in its core activities. That…
• Definition Net profitability is an indicator characterizing the ratio of net profit (loss) to revenue. It describes the final (net) performance of the organization. The indicator reflects the share of net profit...
• Definition Return on sales is an indicator characterizing the level of gross profit (loss) in revenue. It describes the basic performance of an organization. It can be considered the markup level of the enterprise...
• Definition Net return on equity is the ratio of net profit (loss) to the enterprise's existing equity capital. For the owners of the organization, this is a critical parameter, because...
• Definition Economic return on assets is an indicator reflecting the ratio of profit (loss) from sales to assets. That is, this indicator indicates what level of effect...
• Definition of Earnings before interest and taxes (EBIT) is “Profit (loss) before tax” (line 2300) + Interest payable (line...
• Definition Earnings before taxes (EBT) - profit (loss) before taxes. For analysis, we can consider the line analogue of profit (loss) before tax (2300)…
• Definition Deferred tax assets 1180 are an asset that will reduce income taxes in future periods, thereby increasing after-tax profits. The presence of such an asset...

Economics is full of obscure terms in English. One of them is EBITDA (in Russian transcription EBITDA). In the article we will look at what it is, how it is calculated and why it is needed.

In order to evaluate the financial performance of an enterprise, there are many indicators. One of them is EBITDA. Since it is international, it is especially important to use it for those companies that have already entered or are just about to enter the global market.

What is EBITDA

Deciphering this term will help you better understand this concept. EBITDA is formed from the initial letters of the English financial term Earnings before Interest, Taxes, Depreciation and Amortization. It can be literally translated as “earnings before interest on loans, taxes and depreciation.” Using this term, you can evaluate how much an enterprise is able to make a profit without taking into account the influence of loans, taxes and depreciation. This way, investors can assess the profitability of the core business with an unbiased view.

This indicator is especially popular among large companies. It allows international conglomerates, which traditionally have large capital expenditures, to present their financial statements in a more favorable light than standard financial statements.

Video - what is EBITDA in simple terms:

Investors pay special attention to EBITDA. The amount of real profit calculated using this indicator can significantly exceed a similar indicator calculated using advance costs. This is very important especially for those enterprises where the share of depreciation is high. In some cases, it reaches up to 30% of the cost of production. This applies, first of all, to steel production.

Despite the fact that this indicator can distort the real situation, investors still widely use it. This is because it helps to assess the extent to which the company is able to service its debts and reinvest funds for the further development of the business.

History of the indicator in economics

EBITDA was originally used to measure a company's ability to service its obligations. To do this, the values ​​of this indicator were compared for individual companies from the same industry, on the basis of which the amount of interest payments that would be used to pay off the debt was calculated. From this point of view, the company was seen as an asset that could be sold at an attractive price.

At the same time, we can note some nuances of calculating this indicator using this method. It was necessary to summarize the items that could be used to pay off the debt. At the same time, the cost of paying taxes could be taken as an additional basis for calculating debts, provided that all the company’s net profit was directed to the same purpose, and the business turned into an unprofitable one. As a result, the company ceased operations. But the creditors benefited. This indicator was readily used in the 80s of the last century.

What does the EV/EBITDA ratio show?

Next, it is advisable to introduce the concept of EV and the EV/EBITDA ratio.

EV stands for Enterprise value, or company value. It can be defined as the sum of the capitalization of an enterprise and its debts. Investors need this valuation metric to compare different companies.

The EV/EBITDA ratio shows the company's value based on EBITDA. To calculate it, the following formula is used:

EV/EBITDA = (Capitalization + Long-term liabilities + Short-term liabilities) / Earnings excluding taxes, interest and depreciation.

The billing period is one year.

This indicator is used to compare companies with each other. With its help, investors can understand how much a company is undervalued or overvalued by the market.

However, it is important to take into account the industry in which the company being assessed operates. Developing industries are characterized by a higher rate. EV/EBITDA for more traditional industries will be lower. The factor of the country of origin of the company also influences the value of the indicator. Thus, the opposite situation is typical for developing economies, since traditional industries can develop at a faster pace than high-tech ones.

These factors should be taken into account when calculating the indicator.

Features and formula for calculating EBITDA

Since EBITDA is mainly used by companies that have already entered the global market, it is calculated according to international standards. This increases the competitiveness of domestic products, since in this case investors will have more complete information.

This indicator is not used in accounting. However, to calculate it you will need data from the financial statements. Since they are widely available, it compares favorably with other profitability indicators in its ease of calculation.

To calculate EBITDA you must have the following information:

• net profit;
• income tax expenses and the amount of its reimbursement;
• extraordinary expenses and income;
• interest paid and received;
• depreciation deductions;
• revaluation of assets.

All of these indicators, except the last one, form operating profit (EBIT). It is necessary to calculate EBITDA. To calculate it, you need to subtract the costs of day-to-day operations from the company's gross profit. The following formula will help you calculate:

EBIT= Net income + tax expense - tax refunded + extraordinary expenses - extraordinary income + interest paid - interest received

EBIT can only be positive. Now you can calculate EBITDA

EBITDA = EBIT + depreciation - revaluation of assets

It should be noted that we calculated the indicator without taking into account payments: taxes, debts and depreciation.

However, you can use a simplified formula for calculating EBITDA:

EBITDA = revenue – operating expenses

Also, the formula for calculating the indicator can be written as:

EBITDA = Revenues – Expenses + Taxes + Interest on debt + Depreciation and amortization

If you look at the balance sheet data in Form 2, then “Revenue” is taken from line 2110 “Proceeds from sales”, and “Expenses”, respectively, from line 2120 “Full cost”. Lines 2410+2421 +/- 2450 form “Taxes”, and line 2330 - “Interest on debts”. As for depreciation charges, their value should be taken from the Appendices or Explanations.

To make the formulas clearer, let's give an example. To do this, we will use a simplified formula. Let's say you need to calculate EBITDA for the Romashka company. To do this we use the formula:

EBITDA = Profit before tax (2300) + Interest paid (2330) - Interest received (2320) + Depreciation

The Explanation to the annual reports states that the amount of depreciation is RUB 60,000,000.

Data from the financial results report of Romashka LLC for 2017.

Then, EBITDA = 631,428,738 +119,740,422 - 67,912,187 + 60,000,000 = 743,256,973 (rub.)

According to the calculation results, we can conclude that Romashka LLC is able to service its obligations, which form an annual debt payment of no more than 743.3 million rubles.

Advantages and disadvantages of using such an indicator

Among the advantages of using the indicator, we note the following:

• ease of calculation of the indicator and availability of data;
• an opportunity to show the company’s business in a more favorable light.

However, the following disadvantages of using EBITDA can be identified:

• the relative illegality of this concept. Thus, no accounting documents substantiate its existence, and the calculation formulas do not have official documentation. This gives companies the opportunity to distort data;
• the calculation formula does not take into account many minor factors and circumstances, which, nevertheless, can have a significant impact on the final result. Therefore, it is not advisable to use the indicator to determine cash flow. For example, the formula does not take into account working capital, capital expenses, and depreciation expenses.

These shortcomings suggest that EBITDA is not always appropriate to use to calculate the profitability of an enterprise.

Thus, EBITDA is of great importance for investors and company management to assess its profitability and competitiveness. However, its values ​​can often be distorted because the formula does not take into account some important data.

Video about the features of using EBITDA: