Updated Feb 20, 2022

What is Earnings Before Interest Taxes & Amortisation (EBITA)?

What is Ebita?

Introduction

EBITA stands for Earnings Before Interest, Taxes, and Amortisation, which is a measure applied by the investors for the company's profitability. This is used to compare two companies that have the same type of business. Oftentimes, the EBITA of the company indicates the actual performance of that company over the duration.

For Instance- Suppose a company had total revenue of Rs 10,000 in 2018, and the net income was Rs 8000. The company decided to take a loan to purchase inventory to increase its revenue. And now, in 2019, the revenue increased to Rs 12000. But the net profit got reduced to Rs 7000 in the same year. This indicates that the sales were high, but the profit was reduced than the previous year; EBITA could be used here to explain this. As the taxes, interests, and amortisation expenses are adjusted with the company's net income, the profits rise.

EBITA for 2018= Rs8000+ Rs2000+ Rs15000+ Rs0= Rs25000

EBITA for 2019= Rs7000+ Rs2000+ Rs40000+ Rs1000= Rs50000

So, it is clear from the calculation that although the company had a decreased net income by Rs 1000, the total profit in fact increased.   

Calculation of EBITA

The company's earnings need to be determined before tax to get that company's EBITA. Then, these earnings are added with amortisation and interest costs, and we get EBITA. The formula, therefore, stands as EBITA= EBT+ Interest Expense + Amortisation Expense.

EBITA Vs. EBITDA

EBITDA is used more commonly than EBITA. EBITDA also includes depreciation along with all those included in EBITA. Both of these are helpful to calculate the operating profitability of a company. EBITDA can be replaced by EBITA for any company that does not own considerable capital expenditures, which might distort the overall numbers.

EBITA is basically with the function of replacing EBITDA for companies so as the depreciation amounts aren't responsible for distorting the numbers and analysts are in a position of judging if the core operations are getting any profits inclusive of the rusting of the equipment of the company.

Advantages of EBITA

• The operating profitability is indicated by EBITA, while the company's net income shows the overall profitability. The overall profitability isn't the correct measure of the company's success, but the operating profitability is, hence EBITA is significant to know the operating profitability.
• When the taxes, amortisation, and interests' effects are deducted, the actual performance of the company comes into the light, and investors get a better view of the real/actual earnings of the company, which is possible because EBITA does not take into account the effects of the earlier mentioned factors.
• EBITA can be seen in either positive value or negative value, and both indicate different things. For example, a negative EBITA reflects the troubles a company might be into because it shows how poorly the company is managing cash flows or profits, and hence, negative EBITA is not sought after. On the other hand, a positive EBITA reflects upon the company's efficiency in its operation and the amount accessible for the company to get done with dividends or making further investments to grow the business.
• EBITA assists in getting the operational successes relating to different companies to compare those with others. EBITA calculations can be used to indicate the worthiness of a company in terms of credit. EBITA reflects the actual earnings, and these earnings show if the business would be able to get off its debts or not.
• EBITA on the rise could indicate a company's future that it holds after all the debts are clear. The high EBITA comes from only a high net income of the business.
• EBITA deducts the financing costs, and the profitability of the company and its operations are the ones which are mainly focused on, inclusive of the costs of new equipment.

Disadvantages of EBITA

• EBITA is responsible for distorting the perception about a company's health and profitability. For example, EBITA has no record of considering the debts' costs; it might paint a false picture about the company's health.
• EBITA is significant when it is rising, but for a rising EBITA, the company also requires a rising net income. But the companies might be taking loans to expand the business, which ultimately decreases or reduces net income in the following years. And as mentioned, a negative or reducing EBITA is anyway not appreciated.

Conclusion

Though EBITA is considered as a correct reflection of the company's actual earnings. It is found to be removing the interest that the company has on its debt, the taxes that are owed, and amortisation's effects from the equation, and this is seen as a practice of accounting where the costs of insubstantial resources are written off during particular time duration.