FULL FORM OF EBITDA

FULL FORM OF EBITA

EBITDA stands for Earnings before Interest, Tax, Depreciation, and Amortisation. It is a economical tool used to provide insights into a company's profitability. It is used to evaluate company's operating performance. It analyses whether the company can generate income from its core business activities. While doing so, it excludes the impact of financing costs, tax obligations and non-cash expenses like depreciation and amortisation.

Investors, analysts and businesses use EBITDA calculations to compare profitability and evaluate the performance of any company. 

KEY WORDS

WHAT IS DEPRECIATION?

The concept of depreciation recognizes that assets decline its value over a period of time. Depreciation is a methodical way to  asses the reduced cost of any equipment and  fixed asset of the company over a period of time. By smoothing out the financial impact of asset purchases, depreciation affects a business’s income statement and balance sheet.

WHAT IS AMORTIASION?

Amortization in simple words it refers to spreading the cost of an asset over a  set  period. In the case of loans individual or company make regular payments called EMIs (Equated Monthly Instalment), which cover both the loan principle amount and its interest. However, for intangible assets, such as patents, amortization is a way to lower their value over a period of time  in financial records.

IMPORTANCE OF EBITA

• EBITDA calculation  non-operational factors like interest and taxes and non-cash expenses like depreciation and amortisation are not included. Excluding these elements it will provide a  clear view of the company's  profitability.
• It provides a comparative analysis among peer businesses in different tax brackets, industries or capital structures. It helps investors and analysts to assess the performance of any company. It helps in evaluating any companies ability to cover interest expenses.
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EBITA CALCULATION

EBITA calculation are as follows-

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation

Let's assume a company has:

Net income: Rs 10,00,000

Interest: Rs 75,000

Taxes: Rs 50,000

Depreciation: Rs 25,000

Amortisation: Rs 12,000

Let's put these values into the formula and find out what is EBITDA of the company is

EBITDA = 10,00,000+ 75,000 + 50,000+ 25,000+ 12,000

= Rs 11,62,000

In this case, the EBITDA of a company is Rs 11,62,000.

USES OF EBITA

Assessment of Profitability

EBITDA is used to assess a company's profitability. It provides a clear understanding of the company's financial health.

Comparative analysis

It provides a simple and clear analysis of companies from different industries, tax brackets and capital structures.

Debt evaluation

 EBITDA used  to assess whether the company can cover interest payments for the business loan.

Valuation

EBITDA is used by investors and analysts to determine a company's valuation.

DISADVANTAGE OF EBITDA

EBITDA show earning before Interest, Taxes, Depreciation and Amortization. The earning may be ambiguous. For example, a fast growing manufacturing company may present increased sales and EBITDA year over year. To expand there business it acquired many fixed assets over time and they may be funded with debt. Although it may appear that the company has strong topline growth investors and evaluators should look other metrics as well, such as capital expenditure, cash flow, and net income to asses the company financial health.