EBITDA
A calculation of the profit made by a company before taking into account tax and other financial factors.
EBITDA stands for ‘earnings before interest, taxes, depreciation and amortisation’. Calculating it gives an idea of a company’s profit before tax and other financial factors are taken into account. Today, most companies include an EBITDA figure as part of their regular earnings releases.
How useful is EBITDA?
This is a matter of longstanding and fierce debate. EBITDA is widely regarded as useful for comparing companies in different industries or assessing a business with high-value expenses detracting from its net profits. However, critics contend that such costs as depreciation, amortisation, interest and tax reflect real expenses that should not be ignored.Practical Application Example
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EBITDA can be calculated by looking at your company’s income statement and adding its interest, depreciation and amortisation figures to EBT (earnings before taxes). So if your business’s EBT – or operating income – is £500,000, its interest expense is £50,000, depreciation is £60,000 and amortisation is £30,000, its EBITDA is £500,000 + £50,000 + £60,000 + £30,000 = £640,000. ”
