EBITDA for Dummies

In the business world it is very important to know whether a company is profitable or not, as this central question will determine the viability of a company in the medium and long term. One indicator to know the profitability of a company is the EBITDA, as it allows to know if the company earns or loses with its core business.

EBITDA has become a benchmark financial indicator for assessing the profitability of a company, as it is the gross operating profit, which comes from the company's core business and facilitates the comparison of the results of companies with very different profiles.

What does EBITDA mean?

EBITDA is an acronym that stands for Earnings Before Interest Taxes Depreciation and Amortization. It is an accounting measure that allows us to calculate the gross operating profit, and thus to have an indicator of the profitability that a company generates through its main productive activity.

The EBITDA margin (EBITDA divided Revenue) is a ratio through which we can analyze the company's profits or losses derived from its main activity, before deducting amortization and depreciation costs, which do not directly imply cash flows (cash outflows or inflows) and considering financial results and taxes, which do not derive directly from the company's main activity.

Why is EBITDA important?

One of the great advantages of EBITDA is that it makes it possible to analyze a company's profitability by focusing on its core business, without the different ways of calculating amortization and depreciation costs or differences in tax aspects and financing structure affecting the calculation.

In short, the EBITDA calculation facilitates the comparison of companies from very different industries, with different capital structures or from different countries, focusing on a company's ability to generate profits from the core of its business model.

How is EBITDA calculated?

There are different ways of calculating EBITDA, but the most common ones are:

1.From sales: starting from the net turnover, it is obtained by deducting from it the different operating expenses, such as supplies or purchases, personnel expenses and other operating expenses, but not amortization or depreciation expenses.

2.From the result: taking the net result, it is necessary to add the financial result and the taxes paid, thus obtaining the EBIT (Earnings Before Interest and Taxes). Amortization and depreciation expenses are added to this amount.

Are EBITDA and operating profit the same?

The short answer is that they are not the same. While both EBITDA and operating profit are important indicators of a company's financial health, there are some key differences between the two metrics. For example, EBITDA measures a company's profit before interest, taxes, depreciation, and amortization.

Operating profit, on the other hand, measures a company's profit after these expenses are taken into account. Additionally, EBITDA is often used as a proxy for a company's financial performance, while operating profit is typically used to measure a company's overall profitability. Overall, EBITDA and operating profit are important metrics for measuring a company's financial health, but there are some key differences between the two that should be taken into account when evaluating a company's performance.