EBITDA is the term used in the context of accountancy, it is a measure of the company’s operational performance during a particular financial year. Full form of EBITDA is Earnings before interest, tax, depreciation, and amortization. Given below are some of the common questions about EBITDA which worries the majority of people –
Common Questions regarding EBITDA
What is the Formula of EBITDA?
The formula for calculating earnings before interest, tax, depreciation, and amortization is = Net Profit + Interest + Taxes + Depreciation + Amortization where net profit is also called as operational profit as it is calculated after taking into account all operational aspects of the business.
How to calculate EBITDA?
It is calculated by adding non-cash expenses of depreciation and amortization to EBIT also known as earnings before interest and tax of the company. Hence for example, if the EBIT of the company is $50000 and depreciation expense is $5000 and amortization expense is $3000 than Earnings before interest, tax, depreciation, and amortization of the company will be $58000 for a financial year. One should note that EBIT is calculated by adding interest expense and tax to net income earned by the company during the financial year.
Should EBITDA be high or low?
Earnings before interest, tax, depreciation and amortization should be high because a low EBITDA indicates that company might have lower profitability as well as cash flow problem which in turn makes the company less competitive as compared to its competitors and a lower earnings before interest, tax, depreciation, and amortization needs immediate attention of top-level management.
Why do we look at EBITDA?
Earnings before interest, tax, depreciation and amortization allows analysts and investors to look at operating performance of the company because if one looks at EBIT than one can get misguided due to absence of non-cash expense like depreciation and amortization and if one looks at net income than absence of tax and interest expense will not tell the complete picture about the operational performance of the company.
What is the Difference between EBIT and EBITDA?
While calculating EBIT companies add interest expense as well as tax amount to the net profit made by the company during the financial year while calculating earnings before interest, tax, depreciation, and amortization in addition to interest and tax figure companies also add depreciation expense and amortization expense to the net profit figure. In simple words earnings before interest, tax, depreciation, and amortization will always be greater than earnings before interest and tax.