Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) indicates a company’s operating performance, by evaluating performance without factoring in financing, investing or taxation details. EBITDA is calculated by adding back non-cash expenses of depreciation and amortization to the operating income. It can also be calculated by adding back interest, taxes, depreciation and amortization to the company’s profit after tax (PAT).
EBITDA: Operating Profit + Depreciation + Amortization
EBITDA = Profit after tax (PAT) + Interest + Tax + Depreciation + Amortization
EBITDA helps us to focus on the outcome of operating decisions while excluding the impacts of non-operating decisions like interest expenses, tax rates or large non-cash items like depreciation and amortization. Such analysis is important when comparing companies across a single industry but different tax brackets or single industry but different funding structure (e.g. more debt and less equity will lead to lower net profit due to large interest expense).
In order to have a better use of EBITDA, analysts use EBITDA Margin, which measures a company’s EBITDA as a percentage of its total revenue.
EBITDA Margin = EBITDA / Total Revenue *100
To understand in more detail let us take a look at the FY2018 Profit & Loss Statements of ABC Limited:
Revenue: Rs. 24,685
Net profit: Rs. 2,844 crore
Tax: Rs. 115 crore
Interest Expense: Rs. 143 crore
Depreciation: Rs. 121 crore
Amortization: Rs. 3 crore
EBITDA = Net Profit + Tax + Interest Expense + Depreciation + Amortization
= 2844 + 115 + 143 + 121 + 3
EBITDA Margin = EBITDA / Revenue
= 3,226 / 24,685
Thus EBITDA Margin for ABC Ltd. for FY 2018 stood at 13.1%