Value investing covers this much needed term but question remains the same, What is EBITDA? After searching online on google and youtube, you still can’t understand what is it exactly.
Let’s learn each and everything about it and it’s importance in doing a stock analysis.
- What is EBITDA?
- Key take aways
- Two formula to calculate EBITDA
- Why is EBITDA so important ?
1. What is EBITDA?
Earning before interest, taxes, depreciation and amortization ( EBITDA ) is one of the prime indicators to determine a company’s financial performance.
It is used to determine the earning potential of a company. While calculating it, factors like debt financing, depreciation, amortization expenses are removed to get actual profitability.
2. Key take aways from the blog
- We have two ways to calculate it, first one uses operating income as the starting point while the second uses net income as starting point.
- Both results may differ depending on what’s considered in operating income.
- It is a good factor to analyze and compare profitability amongst companies and industries since it eliminates the effects of financing and accounting decisions.
- This calculations is not regulated so there are chances companies may massage certain figure to look more profitable.
3. Two formula to calculate EBITDA
Two ways to calculate it, let’s go through both in detail.
Using Operating income
Operating income + Depreciation & Amortization
Operating income is company’s profit after subtracting operating expenses that is cost of running daily business. It helps investors seperate out the earnings for the company’s operating performance by excluding taxes and interest.
As the name suggests operating income tells us the profit company made by it’s operations.
Operating income is already figured before interest and taxes are taken out, thus only D&A needs to be added to figure it out.
Formula to calculate EBITDA
By Net income
Second formula to calculate it is :
Net income + Taxes + Interest expense + Depreciation + Amortization.
Each of the above data can be found in the income statement.
4. Why is it so important ?
It is used by analysts and investors to compare the profitability of companies by eliminating the effects of financing and accounting decisions.
Hope you got to learn everything about EBITDA from this valuable blog. Stay tuned for more valuable information.