To correctly evaluate a company, and to be able to compare it with others, you require appropriate key figures. However, the profit at the end of the year is not the right choice for all situations. Business economists often use other comparison values. The EBITDA value emerges again and again in this context. But: what is EBITDA?
Key figures are important when it comes to assessing the economic success of a company. To make informed decisions, you need targets that you can work towards. It doesn’t always make sense to use a company’s profit as the sole measure of success. There are other indicators that give you a more realistic idea of the company’s success. EBITA is one of them, but what is EBITA, and how can it be calculated?
EBITA: definition of the key performance indicator
When determining a company's profit or annual net profit, you also take into account income and expenses arising from investments, interest on loans, taxes, and depreciation of various kinds. However, these items are usually only indirectly related to a company’s success. You tend to be able to influence them only by making fundamental strategic decisions – for example, about the choice of company location or financing. Depreciation, too, often has more to do with the corporate strategy than with the operative business.
The acronym EBITA stands for "earnings before interest, taxes, and amortization." Therefore, the indicator does not include any taxes, interest, or depreciation on intangible assets.
The EBITA does not provide any information about the net income you can actually credit to your company at the end of the year. This key figure excludes items that have a significant influence on the operating success, but which do not provide any information on whether your business performed well or badly in the past year. A further advantage of this value is that it works well as a comparative value: Interest, i.e. capital income and capital costs as well as depreciation on intangible assets and taxes are disregarded, whereas depreciation on tangible assets is taken into account. This makes it possible to compare the operating success of different companies, not least across national borders.
According to the meaning of the term "amortization," intangible assets are licenses, patents, software, etc. to which a concrete value can be attached. If they were created by the company itself, they can be included in the balance sheet if you wish, otherwise they are mandatory. If a specific operating lifespan can also be specified for such goods, they can be depreciated accordingly.
In addition, there are intangible goods that can contribute to the value of a company, but do not have a concrete quantifiable value themselves, such as trademarks, newspaper mastheads, publishing rights, and lists of customers, etc.
In addition to interest costs and income, EBITA also excludes other extraordinary and non-recurring costs, or income that is not attributable to the company's operating success. Values like these can also distort the picture and make it difficult to compare your company with others.
With regard to its concept, EBITA sits betweenEBIT and EBITDA: These two indicators also omit some items, and they are suitable in various ways for working out the success of a company. The EBIT merely does not include interest and taxes, while depreciation is taken into account. On the other hand, EBITDA also excludes depreciation of property, plant, and equipment.
The EBITA indicator is not used by law and is not defined in any way. Therefore, different companies can determine the value in different ways, which could limit their comparability.
How the EBITA calculation works
Since the law doesn’t require EBITA to be disclosed, there are also no binding rules for its calculation. In principle, you have two different options for calculating EBITA: either based on profit or on annual net profit. You use the first method to calculate EBITA as an intermediate step in the income statement. Use the total cost method for this:
|+||Other operating income|
|-||Other operating expenses|
|-||Depreciation of property, plant, and equipment|
The cost-of-sales method, which you can use to calculate EBIT, is not suitable for the EBITA calculation: The corresponding depreciation and amortization is not shown in this procedure and can therefore not be calculated without further information.
However, you also have the option of calculating back from the annual net profit. You add the items (that EBITA does not take into account) to the result.
|Annual net profit|
|+||Amortization of intangible assets|
Calculating EBITA using an example
The EBITA calculation can be explained quite well using an example consisting of two different fictitious companies. While the first company generated an annual net profit of $500,000, the second company generated $600,000. However, the two companies are based in different countries and do not finance themselves in the same way. Based on the annual net profit, EBITA can be calculated in this way.
|$500,000||Annual net profit|
|+||$50,000||Amortization of intangible assets|
|$600,000||Annual net profit|
|+||$0||Amortization of intangible assets|
The second company has not purchased any intangible assets with quantifiable operational lifespans and does not intend to depreciate its own developments. This means that there is no depreciation here. As a result, both companies have the same EBITA despite their different annual net profits.