What is EBITDA?
EBITDA is a financial indicator (an acronym for Earnings Before Interest Taxes Depreciation and Amortization) that shows your company's profit before subtracting the interest you have to pay for the debt incurred, the taxes applicable to your business, the depreciation for impairment and amortization of the investments made. The purpose of EBITDA is to get a true picture of what the company is gaining or losing in the core business.
Although it is not part of a company's income statement, EBITDA is a ratio that allows you to know quickly and easily if your business is profitable or not, since it represents the gross operating profit calculated before deducting financial costs.
How is EBITDA calculated?
EBITDA is calculated on the basis of the company's final operating profit, excluding financial items (interest on debt), taxes, changes in the value of fixed assets (depreciation) and investment recovery.
Steps for calculating EBITDA:
- The first thing to do is to find the operating profit in the income statement, which is also known as EBIT (Earnings Before Interests, TaxThe first thing to do is to find the operating profit in the income statement, which is also known as EBIT (Earnings Before Interests, Taxes).es).
- To this figure the amounts allocated to provisions must be added.
- Finally, the amount corresponding to productive amortization is also added.
What is EBITDA used for?
These are some of the main uses of EBITDA:
- Its main use is to show you the results of your business without taking into account financial or tax considerations. In other words, it lets you know whether or not the driving force of your company, the business itself, works beyond other constraints or the way you have financed it.
The important thing with EBITDA is to know how much your business can generate. Thus, if this indicator is positive in your business, it means that, in principle, it is profitable, and that its success will depend on your management of financial costs, as well as taxation, depreciation and amortization policies. In the same way, if you get a negative EBITDA, you should be thinking about the continuation of your business.
- It is also very useful for comparing companies, their historical data, and their health and vitality, as it shows information that is not affected by financial leverage, taxes or depreciation costs, which in some companies are very high.
In addition, it allows the profitability of different companies, even from different countries, to be measured on a uniform basis.
- You can also use it to see your company's solvency at a glance.
Because with this indicator you can estimate, in a more concise way, what the available cash flow of your company is.
In other words, it shows you how much money your business has left to pay its debts after subtracting the major expenses.