3.1.8. EBITDA
The EBITDA (Earnings Before Interest, Taxes, Depreciations and Amortizations) is easily identifiable on the income statement, since it corresponds to the profit before depreciation, financing costs and taxes. It may be inferred as a reference of the operating activity of the company. Lets see how to calculate the EBITDA:
+ Net Revenues
+ Operational grants
– Raw materials and consumables
– Operating expenses
– Employees’ benefits
+ Other gains
– Other costs
= EBITDA
The EBITDA is usually regarded as indicator, and as in any other indicator you should pay attention to both the result and to how it is composed: while calculating it you may include items from the income statement that are not directly related to the main activity of the company, such as gains and losses charged to subsidiaries or fair value increases (or decreases). If that is happening, you should decide if there is a need to adjust the EBITDA.
While comparing two companies within the same industry, you should also understand if both companies have similar investing and financing profiles.
Example – Analyzing the EBITDA
Two companies have similar operations, but company A uses a rented office and company B has bought its office. Company B’s EBITDA will be higher because it does not support rent.
| Income Statement |
A |
B |
| Net revenue |
5.500.000 |
5.500.000 |
| Raw material and consumables |
2.000.000 |
2.000.000 |
| Operating expenses (except rents) |
1.250.000 |
1.250.000 |
| Rents |
300.000 |
0 |
| EBITDA |
1.950.000 |
2.250.000 |
It may seem company A is less profitable, when in fact the difference between the two was only a management decision to buy an office or to rent it.
Renting allows an easier adjustment if the company needs to grow. Acquiring an office may imply contracting a bank loan and paying interest on that debt, along with capital repayments. These are strategic and financial decisions that have been made and that set the difference in how an investor sees each company. Yet, from an operational standpoint, both companies are equal.
You may have noticed that if company B owns an office has an asset, then it should be depreciated. If so, you are correct: it would be depreciated and it would haven a non-cash effect on the income statement.
Next Section: 3.1.9. Depreciations