What is EBITDA and how is it calculated?

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Anyone who still believes that profit is the only indicator of a business's success is mistaken. Although it is decisive, there are several other indicators to evaluate a company's performance – each with different objectives. But if you are looking to know the profitability of your business, then the solution is to calculate EBITDA .

What is EBITDA?
Earnings Before Interest, Taxes, Depreciation and Amortization is what EBITDA stands for. This indicator for analyzing the performance and value of companies shows how much profit the company is able to generate, without considering other financial effects . These effects are, as the name suggests, debt interest, taxes, amortization and depreciation.

In other words, EBITDA shows the gross operating profit , the value of which is iceland whatsapp number database for determining, for example, whether a project can become profitable or not.

However, it is important to understand that the fact that these factors, such as taxes or loans, are not taken into account means that EBITDA is not used to assess the entire financial reality of a company , which means that a company may be profitable in its operations, but not doing so well overall due to accounting and financial factors.

Why is it calculated?
What is the real use of EBITDA for companies? Although, as we have already mentioned, EBITDA does not allow us to measure the entire financial and accounting situation of a company, it does have some specific applications, particularly when there is no need to take into account factors that are difficult to measure and compare or that vary from country to country (taxes, for example). With this in mind, EBITDA is used because:

1. Calculates a company's performance
Because it is not dependent on financial effects, EBITDA shows whether a company's mechanism is working efficiently. By analyzing the profitability resulting from the company's operational activity, it is possible to understand its productivity and how well the business will function, without the influence of other external factors.

2. Allows for an objective analysis
EBITDA allows us to know what a company's cash flow is. In other words, it shows a clearer and more accurate picture of what the company earns or loses from its operational activity alone. Since non-monetary items such as depreciation and amortization, as well as expenses related to financing, are removed to calculate EBITDA, this indicator allows us to deduce the company's ability to generate cash flow and liquidity.

3. Allows you to compare your company to others
This indicator can be used to identify companies that are the most efficient within a given market segment. This is because EBITDA is not affected by any external effects on operational activity: taxes in each country or amortization costs, for example.

4. It is a useful indicator for investors
Investors use EBITDA as a mechanism to understand the profitability of the activity in which they intend to invest, individually and in comparison with other companies in the same sector or in different sectors.

How is EBITDA calculated?
Calculate EBITDA based on net income
The net result (or profit or loss) consists of deducting all expenses from the total profits , including interest, taxes, depreciation and amortization. To arrive at EBITDA, in this case, it will be necessary to add these values ​​back to the net result to exclude:

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
Calculate EBITDA from EBIT
For this calculation method, it will first be necessary to understand what EBIT or net operating income is. This concept represents earnings before interest and taxes.

EBIT = Sales – Costs – Operating expenses
To arrive at EBITDA:

EBITDA = EBIT + Depreciation + Amortization
Difference between EBITDA and EBIT
EBIT ( Earnings Before Interest and Taxes ) is an indicator similar to EBITDA, but its calculation takes into account the influence of depreciation and amortization, allowing us to understand how a company's results behave taking into account the fixed assets it purchased to carry out its activity.

In the case of EBITDA, as depreciation and amortization can vary greatly depending on the type of investment and the respective rates applied between companies, affecting a direct analysis of their operational profitability and making a correct comparison impossible, these are not taken into account.

Control your company's efficiency effortlessly
One of the simplest ways to understand where your business is at is to use management solutions. And better than always having updated results, is to have them in real time, at any time and on any device. This only happens with cloud software.

With ERP Evolution you can monitor all your business indicators and access accounting, sales, current account or tax results at any time. ERP Evolution is equipped with intelligent mechanisms that allow you to predict results based on historical data.

With this ERP that integrates all areas of the business, it is easier to anticipate results. The solution provides performance indicators for the various services and forecasts of results, which help to always make the best decisions at the right time.