There are many different indicators for evaluating a company's financial performance. Some of them are generally accepted, not only in our country, but throughout the world. These include EBITDA. What is this indicator, how is it calculated and why? In this article, we will examine in detail how the financial results of an enterprise are estimated based on EBITDA values ββand for what purposes they are used.
EBITDA: Transcript and Meaning
It should immediately be noted that this analytical indicator is not part of accounting. And its initial purpose is to assess the attractiveness of a company in terms of its absorption on borrowed funds. How is the analysis performed? First, EBITDA is determined, which is calculated on the basis of the financial statements of the enterprise. Then, the obtained indicator is compared with industry analogues, as a result of which the effectiveness of this particular company is revealed.
In order to understand how the comparison occurs, you need to decipher the EBITDA value. What is this indicator, and what information does it give about the enterprise? The term stands for Earnings before Interest, Taxes, Depreciation and Amortization. Translated literally, this is the profit before interest on loans, taxes and depreciation. That is, the ability of a company to earn regardless of whether it has debt to creditors, the state, and the depreciation method used is evaluated. The profitability of the main activity is determined directly, which allows you to analyze it "impartially".
Calculation of EBITDA according to international standards
Since this indicator is used all over the world, the basis for its calculation should be the data of statements complying with IFRS. Specifically, the following values ββwill be needed to determine EBITDA:
- net profit (remaining after payment of taxes and other payments to the budget);
- income tax expenses;
- amount of refunded income tax;
- extraordinary income and expenses;
- interest paid and received;
- depreciation amount (both for tangible and intangible assets);
- revaluation of assets.
The first five indicators form EBIT, or operating profit. It is defined as the difference between gross profit and costs of the ordinary activities of the enterprise and is the basis for calculating EBITDA. The EBIT calculation formula looks like this:
- Net profit + tax expense - refunded tax + ext. expenses - extra. income +% paid -% received.
As a result, we get an intermediate indicator between gross and net profit. This is the profit that a company that does not use borrowed funds would receive . It includes all income from sales and other income, as well as expenses (including depreciation).
EBIT and EBITDA
EBIT should be at least positive. Knowing it, you can calculate the EBITDA value. The calculation formula is as follows:
- EBIT + depreciation charges for MA and NMA - revaluation of assets.
Thus, we get the company's profitability indicator before taxes, interest on loans and depreciation expenses in accordance with international standards. By eliminating such non-monetary items of expenditure (which can be called a kind of formal accounting accruals), EBITDA becomes closer to operating cash flow.
EBITDA in the history of economics
As already mentioned, earlier this indicator was intended to analyze the ability of an enterprise to service borrowed funds (or debts). Lenders could evaluate the EBITDA of various companies in the industry and based on them determine the amount of interest payments that each of them will be able to provide in the near future. The indicator was very interesting for credit raiders who were looking for suitable companies for profit. The enterprise was considered, rather, not as a subject of the economy, but as a set of assets that can be successfully sold. For this, all the articles that could potentially be directed at paying off the debt were summarized. Moreover, if all net profit was used to pay the debt, and the business as a result became unprofitable, then tax expenses could be considered as an additional basis for calculating debts. Naturally, for the company itself, this became an insurmountable problem - all of its funds were withdrawn, and as a result, activities had to be stopped. But lenders remained in the black. This made EBITDA particularly popular in the 80s when there was a buyback / takeover fever on borrowed funds.
EBITDA in the modern financial activities of companies
Today, this indicator is the third in a series of tools for assessing the performance of the five hundred largest corporations in America and is necessarily included in their annual financial statements. It shows the total income that the company will bring in the current reporting period. In addition, it calculates the investment return on EBITDA.
The investor's main interest is the future income of the enterprise in which he plans to invest, which means that EBITDA is important to him. Knowing it, you can determine the return on investment ratio. The formula is as follows:
Based on the obtained values, the potential of companies having a different structure but working in the same industry is compared. For investors, this indicator is an important indicator of the return on their investment.
Indicator Benefits
Why are many companies, especially large ones, interested in calculating the EBITDA? What does this give them? Explaining your interest in this profitability measurement tool is easy. Enterprises with a sufficiently large volume of capital expenditures are able to present their business in the most favorable light than on the basis of standard reporting. Investors' attention is focused on the EBITDA, which can significantly exceed the amount of real profit calculated taking into account advance costs. But in some enterprises the share of depreciation can reach 30% of the cost of production (steel production, cable TV, etc.).
Despite the fact that due to the use of this indicator, a business often looks stronger than its real cash flow says, many analysts today pay much more attention to it. This, however, is justified. After all, it is on the basis of EBITDA that you can assess the company's ability to service its obligations and reinvest funds for future business development.
Comparison of companies by EBITDA
This indicator is widely used to determine the location of an enterprise in the industry. For this, a comparative assessment is made. It includes two required components:
- calculation of business value (in comparative form, for which prices are converted into multiples of profit, sales volume and book value) ;
- Comparison with comparable industry enterprises.
Thus, the company is evaluated in the financial market. It is simply compared to another similar business, whose shares are quoted in the same industry segment. EBITDA is in demand by most public companies and is necessarily present in financial statements prepared for potential investors.
Conclusion
We can conclude that the indicator considered by us is one of the most important both for the companies themselves and for investors. We found out why all of them are interested in the EBITDA, what this gives to the business owners themselves and those interested in investing in it. For the former, this is an opportunity to present their company in a favorable light, for the latter, a way to assess the potential income that can be obtained from investments in its activities.