The idea of ebitda comes from the English expression Earnings Before Interest, Taxes, Depreciation and Amortization.
EBITDA is an acronym from the English expression Earnings Before Interest, Taxes, Depreciation and Amortization (that is, Earnings before Interest, Taxes, Depreciation and Amortization ). It is a term frequently used in the field of economics and finance .
It is interesting to mention that an acronym is an abbreviation that is formed with the initial letters of a phrase or expression. When an acronym is pronounced like a word, it is called an acronym .
In this specific case, the Urgent Spanish Foundation ( FundéuRAE ) points out that the notion should be written as ebitda (all in lower case), since it is used as a noun that is part of the usual lexicon. Its gender, meanwhile, is masculine due to its correspondence with the words benefit and result . Therefore, “ebitda” and “ebitdas” must be indicated.
What is EBITDA
EBITDA is an indicator that reflects the gross operating profits obtained by a company , before applying the deduction of financial expenses (interest, taxes, etc.). The usefulness of EBITDA in an audit or analysis varies according to multiple factors and is questioned by some specialists.
For many economists, EBITDA is important since it allows comparisons to be made without the distortion produced by those financial expenses that, in the future, can be compensated and, therefore, improve the result.
The purpose of EBITDA is to show whether a company wins or loses by developing its main business . That is why it leaves out tax disbursements, interest payments and the drop in value caused by amortization and depreciation, focusing only on the gross operating margin .
EBITDA is useful to know the profitability of a company.
What is it for?
It is relevant to mention that ebitda cannot only be used to compare the performance of two companies. It can also be used to compare how a firm fared in different periods, always focusing on its core activity and discarding other data.
It must be taken into account, on the other hand, that EBITDA does not show the cash flow of the business . This is because it ignores the investments made in fixed assets and the changes that occur in working capital. Regarding the cash flow available to the entity, however, the ebitda helps to know it easily, since it reflects the money that the company has available to assume its debts after the corresponding subtraction of its main expenses.
At this point it should be mentioned that, while cash flow shows the fluctuations in cash expenditures and receipts in a certain period, cash flow focuses on the movement of cash at a general level.
EBITDA and OIBDA
In the field of finance and economics, it is also common to come across the acronym OIBDA , another technical term of English origin: it is Operating Income Before Depreciation and Amortization , and its original version is Operating Income Before Depreciation and Amortization . In simpler words, this concept represents the difference that exists between expenses and income as a result of commercial activity that is neither accounting nor financial.
The activity covered by the OIBDA is the one that a company carries out before accounting for the loss of assets due to the passage of time and use. It is important to note that this indicator is of no use to the company, since it does not reflect its true state.
Ebitda, on the other hand, can be used to control the profitability of a business, because it is based on the company's profits and losses . The reason we can rely on ebitda to make a comparison of the results of one or more companies over a given period of time is that it is not supported by tax or financial issues or accounting expenses that do not lead to an exit. of money.
In order to carry out this comparison, the ebitda involves dividing the term to be analyzed by the investment made by the companies involved, or by the sales they made in the same period. This gives us a ratio that is directly proportional to the operational effectiveness of the firm.
This measurement of results allows us not to involve certain tax and financial issues, or amortization and depreciation, to provide a result beyond the events that could take place in certain companies due to issues such as a certain tax treatment, the quantification of their depreciations or financing that is extraordinarily favorable.
Thanks to EBITDA, it is possible to know if an entity loses or gains with the development of its main business.
Other indicators
The ability to generate a positive cash flow statement is essential for all companies. In addition to EBITDA and OIBDA, there are other indicators that are useful for accounting .
EBIT , for example, can be obtained from the income statement as EBITDA, calculated as the difference between operating income, sales expenses, general and administrative expenses and operating costs. What it does is report the profit in the period prior to deducting taxes and financial expenses.
The idea of net profit , for its part, contemplates profits or losses taking into account the deduction of various accounting expenses and temporary cash fluctuations. It must be considered that, depending on the indicator used, the information may be more or less adequate for the analysis of the firm's solvency , liquidity , risk management and other issues.
ebitda calculator
Use this ebitda calculator to quickly evaluate the operating profitability of a business.