Every company needs to be assessed over a period of time to find its true profitability and to have a rough forecast of its financial future. To do this, people use various parameters and tools. One such parameter is ebita, which investors have been using to study a company’s strengths and weaknesses and back their claims with substantial data.
What is EBITA?
EBITA, or Earnings before interest taxes and amortization, is the term used to indicate the earnings of a company without adding interest or deducting taxes and amortization expenses. Investors in the stock market and financial institutions use ebita to assess the finances of a company before investing in it.Â
Every investor needs to understand ebita meaning to compare two companies in the same business to find the best one among the two. Furthermore, it also provides an accurate analysis of a business’s correct value. One can also get the value of another critical parameter, EBITDA, by adding up depreciation to the ebita value.
What Is The Significance Of EBITA?
Some of the key significance of ebita are as follows –
1. Determine The Net Profit Of A Company:
The income and expenses of a company, its taxes, and loans, along with its different kinds of depreciation, do not often give a clear picture of a company’s image. These values may tell the overall analysis of the profitability of a company, but only Ebita can tell the true operating profitability of a company.
2. Asses The Actual Performance Of A Company:
As ebita is free of taxes, amortization, and interest earned by the company, it presents the most accurate performance of the operations of any company. Based on this data, investors can invest in any company, be safe about their investments, and expect some decent earnings from their investments.
3. Indicates Cash Flow:
Cash flow, in simple terms, means the amount of money that is getting transferred out of a business and coming in, which indicates the liquidity of a company. The value of ebita can either be positive or negative. A positive value of ebita indicates a good efficiency of a company and a positive cash flow.
While a negative ebita meaning that the company is struggling to maintain a steady cash flow and is not making profits. This proves to be a significant value as it deters investor from wasting their money on any bad company and saving their capital.
4. To Determine The Creditworthiness Of A Company:
As ebita is free of taxes, amortization, and interest earned, it indicates the actual operating progress of a company. It shows how resilient is the company’s infrastructure or supply chain management system. The creditworthiness of a company is indicated by its real earnings, which shows how credible a company is and how are its capability to pay off its outstanding debts or any capital that it may borrow in the coming time.Â
5. Forecast A Company’s Future:
A good ebita figure indicates that a company has a high net income, which means that it has been utilizing its loans to make a sufficient amount of profit. Ebita can also indicate if a company has been taking a lot of loans and one refrains from investing in such a company, as these loans can decrease its earnings in the coming years. But Ebita can give a clear idea of what a company’s future can be after it clears its loans. Therefore, EBITA meaning should be known if you want to know the future of a company once all its debts are paid.
Where Can One Access A Company’s Ebita?
You cannot access the ebita from a company’s website as they do not usually post these metrics for the public. However, you can find this data in the company’s financial statements, or if it is not there, you can use the data from the statements to calculate ebita on your own.
You just need to look for earnings, interest earned, and tax figures in the tax statements. You can find amortization in the cash flow statement or the operating profit data of the company. If you do not know the methods to calculate ebita, don’t worry; we are here to teach you about the different methods you can use to calculate ebita.
Image – Sample income statement
How To Calculate Ebita?
You can calculate ebita using these two methods –
Direct method:
In this method, the COGS, or the cost of goods sold, along with operating expenses without amortization, is subtracted from the company’s revenue.
EBITA = Total Revenue – (Operating Expenses – Amortization) – COGS
However, this method may not always work as companies do not often provide their operating expenses in their financial statements. The cost of goods sold or COGS is also not present in most of the financial statements, making it impossible to calculate ebita from this method.
Indirect method
In this method, you do not require the cost of goods sold or the operating expenses to calculate the ebita data. In this method, all you need is taxes paid by the company, interest earned by them, and their amortization amount. These amounts are added to the net income of the company, which gives out the EBITA value.
EBITA = Net income + Taxes + Interest + Amortization
All of this data is available in the income statement of the company, and thus, one can easily calculate the EBITA value.
Bottomline:
Ebita is a powerful tool to analyze the statistics of a company to evaluate its performance and predict its future profitability. This data can be well be used to find the valuation of a company and to decide whether to invest in the company or not. Now that you know the ebita meaning, it’s time to evaluate a few companies and find the one that suits your investment goals and invest in it.
With this data, you can be sure that the company has been evaluated on fairgrounds and that there is a positive change in the company’s profitability in the coming years that can multiply your investment manifolds.
