EBITDA - All You Need to Know (if you are not in finance)
Bogdan Neagu
Engineer @ Electroprecizia Wagner Casting S.A. | LinkedIn Open Networker [LION]
EBITDA meaning
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric used to evaluate a company's operating performance and profitability. EBITDA provides a clearer picture of a company's profitability by excluding non-operating expenses such as interest, taxes, and non-cash expenses like depreciation and amortization.
EBITDA is often used by investors, analysts, and lenders to assess a company's ability to generate cash flow from its core operations. It allows for better comparisons between companies in different industries or with different capital structures.
EBITDA formula
To calculate EBITDA, you start with a company's net income and add back interest, taxes, depreciation, and amortization. The formula is as follows:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA is a useful metric because it provides a measure of a company's operating performance before the impact of financing decisions, accounting practices, and tax regulations. However, it is important to note that EBITDA does not represent a company's actual cash flow, as it does not account for changes in working capital or capital expenditures.
EBITDA margin
To calculate the EBITDA margin, you can use the following formula:
EBITDA Margin = (EBITDA / Total Revenue) *100
Simply divide the EBITDA by the total revenue and multiply the result by 100 to express it as a percentage. Because EBITDA is calculated before any interest, taxes, depreciation, and amortization, the EBITDA margin measures how much cash profit a company made in a given year. A higher EBITDA margin indicates better operational performance.
EBITDA multiple
Calculating EBITDA multiple involves dividing the enterprise value by EBITDA.
EBITDA multiple = EV / EBITDA
This metric is valuable for comparing companies within the same industry or sector, aiding in investment decisions and financial analysis.
TL;DR
In summary, EBITDA is a financial metric that helps assess a company's operating performance and profitability by excluding non-operating expenses. It is widely used in financial analysis to compare companies and evaluate their ability to generate cash flow from their core operations.