Earnings before interest, taxes, and amortization (EBITA) is the efficiency measure which is used to calculate the operational profitability of the company by including the equipment cost and excluding financing cost.
For the measurement of the business, earning and profitability this ratio is mostly used by an analyst, investors and accountant. It is the common derivative of EBIT and EBITDA.
According to the type of company, analyst used this ratio to calculate the and understand the earning of the company.
Definition: What is EBITA?
To measure the core profitability of the company EBITA is used. This is used to measure operating profitability of the company without regard to capital finance of capital expenditure.
EBITA may be the misleading ratio because those companies which have a large amount of investment take a large amount of depreciation that has little impact on the cash flow and reduces the profit.
When it adds back the depreciation expense then it increases the profit of the company artificially.
For large depreciation companies, EBITA ratio may be misleading because for such type of companies actual cost of an asset not represented.
By subtracting the cost of goods sold and the sum of operating expenses and amortization expenses from gross revenue we get the EBITA formula.
EBITA = Total revenue – COGS – (operating expenses + amortization)
It is the formula to calculate EBITA from the direct method because it computes the total straight from total revenue.
EBITA can be calculated by indirect method formula of which given below.
EBITA = Net income + Interest + Taxes + Amortization
This is the simple formula which value can get from income statement of the company. It depends on the record type that you use which financial method of EBITA.
Now we take the example of the shop of ice cream. Total revenue in 2015 of this shop is $300,000 and the net profit of shop is $195,0000. To increase the net income and revenue new ice cream purchase for this shop in 2016.
At the end of 2016, the revenue is $500,000 but the net profit decrease in this year which is $191,000. Income statement For the shop in 2015 and 2016 is
For 2015 and 106 we calculate the EBITA as
$ 240,000 = $195,000 +$5,000 + $40,000 + 0
$390,000 = $191,000 + $5,000 + $89,000 + $105,000
from 2015 to 2016 earnings before interest, taxes, and amortization increase but net income decrease.
What is Ebita Margin?
EBITA Margin is actually related to the assessment of operating Profitability of a firm as a percentage of the total revenue of the firm.
EBITA Margin = earnings before interest + tax + depreciation and amortization/Total Revenue
Analysis and Interpretation
EBITA metric use to replace the EBITDA metric for those companies which have a high capital expenditure due to which ratio skew.
In the above example net income of ice cream shop decrease in 2016 as compared to the net income in 2015. The main reason for the decreasing in the net income is due to the interest and depreciation expenses associated with the acquiring of the new equipment for the shop.
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