Meaning of EBITDA

What is EBITDA:

EBITDA is a financial indicator. Its name comes from the acronym in English of Earnings Before Interest, Taxes, Drepreciation and Amortization, whose translation means "benefits before interest, taxes, depreciation and amortization" of the company.

EBITDA is one of the best known financial indicators and used to carry out profitability analysis of a company in order to obtain an approximate measure of its operation. That is, to have the real knowledge of what is being gained or lost in the business.

Therefore, EBITDA is applied to measure the ability of a company to generate profits from a productive activity without taking into account all expenses in its calculations.

Therefore, the result of the indicator may show a high number, but this does not mean that it is positive, since then, from that final number, the payment of debts must be subtracted.

The calculation is carried out in a simple way and from the final result of the company's production, without considering the expenses for interest, taxes or amortization.

This happens because interest rates vary according to the interest percentages in force in a given period and according to the entity to which it must be paid.

It is important to note that the result of this indicator should not be confused with cash flow, if this mistake is made, the economic soundness of a company can be seriously affected.

Advantages of EBITDA

Applying the EBITDAN indicator generates a set of advantages thanks to the information obtained from said analysis, among them are:

  • The possibility of having knowledge of the real money flow available to the company to later assume the debt payments and
  • make comparisons of the company's history throughout its operations and even with others in the same area.

EBITDA formula

Now, to perform the EBITDA calculation it is necessary to apply the following formula:

EBITDA = revenue - costs of goods sold - general administration costs.

As can be seen, interest, tax and amortization expenses are not considered. Consequently, the result of the company's production is obtained, beyond the existence of these fixed payments.

Difference between EBIT and EBITDA

EBIT and EBITDA are indicators that differ in a small detail.

EBIT is an indicator of the results of the production levels of a company, whose initials come from Earnings Before Interest and Taxes. That is, the financial calculations of a company are made without taking into account the interest and taxes to be paid.

Hence, it differs from the EBITDA indicator, which also does not consider interest, taxes plus amortization in its analysis.

Therefore, the EBIT exposes results in the previous phase of knowing the net profit of the company.

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