What is EBITDA?

“Earnings before Interest, Tax, Depreciation & Amortization.”

Earnings before interest, tax and amortization (EBITA) is similar to EBIT but strips out amortization. Amortization is always a non-cash item and therefore of limited interest to investors. Amortization is of less interest than depreciation (itself excluded from many measures) because it relates to intangible assets, and it cannot be used as even a rough proxy for replacement cost. EBITA is used in similar ways to other profit measures such as EBITDA. 

 

The commonest valuation ratio that uses EBITA is EV/EBITA. This is similar to EV/EBITDA apart from the inclusion of depreciation as a cost. EV/EBITDA is usually preferable. EBITA is an acronym that refers to a company's earnings before the deduction of interest, tax and amortization expenses. See EBITDA. It is a financial indicator used widely as a measure of efficiency and profitability. EBITA margins in developing telecom markets can be as high as 60%, but margins vary greatly across industries and over time.

EBITA can be calculated by taking the Profit Before Taxation (PBT/EBT) figure as shown on the Consolidated Income Statement, and adding back  Net Interest and Amortization. Often, Amortization charges are zero and therefore EBIT = EBITA.

A rough measure of operating cash flow, effectively, operating profit with depreciation added back. It differs from the Net Cash Inflow from Operating Activities shown in cash flow statements due to working capital movements. Earnings before interest, taxes, depreciation and amortization or, to give it its acronym, EBITDA, is a measure of a company's cash flow before certain deductions. It allows investors to see how much money a company is making before taxes, depreciation and amortization have been deducted. Basically, when investors place money in a company, they will want to know how much money the company has been making since their money was invested. EBITDA gives the investor an idea of how much money the company has made before its deductions. 

It is especially useful for a new company who has just started business and has not yet been hit with taxes, payments to creditors, and so on. If the EBITDA figure seems to have a good growth rate, then some investors may use this figure instead of the overall net figure. It can show them that the company has a future for potential growth and that they will get a return on their investment. Investors call this looking at the EBITDA margin rather than the net margin.

Amortization

Amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chiefly used in loan repayments (a common example being a mortgage loan) and in sinking funds. Payments are divided into equal amounts for the duration of the loan,
making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end.

The amortization calculator formula is: (1-vn)÷r, where n = number of years, v = 1÷(1+r),
and r = interest rate ÷ 100. See also time value of money.
Divide by (1+r) if a payment is due at the beginning.

Earnings

The net profit of a company that is distributed to its shareholders.
 

Depreciation

Depreciation is the drop in value of an asset due to wear and tear, age and obsolescence (going
out of date) as recorded in an organizations financial records.

Company Taxation

The system for taxing company profits.