In business analysis, especially when evaluating companies for investment or tracking financial performance, EBITDA is one of the most commonly used metrics.
But what exactly is EBITDA? And why do investors and analysts care about it so much?
Let’s break it down in the simplest way possible.
What does EBITDA stand for?
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization
In simple words:
It measures a company’s core operational profitability, before considering:
-
Interest payments on loans
-
Taxes
-
Depreciation of physical assets (like factories, machines)
-
Amortization of intangible assets (like patents, goodwill)
Why is EBITDA important?
-
Focuses on operational performance
It strips out non-operational costs (interest, taxes) and non-cash expenses (depreciation, amortization), giving a cleaner view of how the core business is performing. -
Helps compare companies across industries
Companies in different industries (like manufacturing vs IT) may have different capital structures and tax rates. EBITDA allows for an apples-to-apples comparison. -
Used in valuations
Many valuation multiples like EV/EBITDA (Enterprise Value divided by EBITDA) use this metric to assess if a company is overvalued or undervalued.
How is EBITDA calculated?
There are two common methods:
1. Starting with Net Profit:
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
2. Starting with Operating Profit (EBIT):
EBITDA = EBIT + Depreciation + Amortization
Both give the same result.
Example: Real-life EBITDA calculation
Suppose a company reports the following annual results:
| Particulars | Amount (in Rs crore) |
|---|---|
| Revenue | 1,000 |
| Operating Expenses | 800 |
| Depreciation | 50 |
| Amortization | 20 |
| Interest Expense | 10 |
| Taxes | 8 |
-
Operating Profit (EBIT) = Revenue – Operating Expenses – Depreciation – Amortization
= 1,000 – 800 – 50 – 20 = Rs 130 crore -
EBITDA = EBIT + Depreciation + Amortization
= 130 + 50 + 20 = Rs 200 crore
So, the company’s EBITDA = Rs 200 crore
EBITDA margin (Another important metric)
Formula:
EBITDA Margin (%) = (EBITDA / Revenue) × 100
Using the above example:
EBITDA Margin = (200 / 1,000) × 100 = 20%
A higher margin shows better operational efficiency.
EBITDA vs Net Profit – What’s the difference?
| Aspect | EBITDA | Net Profit |
|---|---|---|
| What it shows | Operating performance | Bottom-line profitability |
| Includes | Core operations | Interest, tax, depreciation, amortization, and other incomes/expenses |
| Used for | Valuation, comparisons | Final shareholder earnings |
Remember: EBITDA is not cash profit. It ignores important costs like interest and taxes.
When to be cautious with EBITDA:
-
Companies with high debt: EBITDA hides interest burden.
-
Capital-intensive businesses: Ignores large depreciation which affects real cash flow.
-
Misleading adjustments: Some companies manipulate “Adjusted EBITDA” to inflate profitability.
Summary takeaway:
EBITDA is a useful tool to assess operational efficiency, especially when comparing companies across industries or geographies. But it should never be viewed in isolation. Always compare it with net profit, cash flows, and debt levels for a full picture.
