For determining the financial health of any business, EBITDA is a typical term used in business and can be easily found by the EBITDA Calculator powered by calculatored. It is representative of a company’s ability to generate cash flow. At the time of selling it is the most important widely used parameter to tell about company worth as EBITDA is a net income of a company without deducting taxes and depreciation.
What is EBITDA?
It is a business metric analysis developed by the CEO of cable and media giant tele-communication Inc. it is a term used to project company long term profitability and measure its ability to repay future financing. It is also used to generate valuable comparison between different companies and industries. Calculating EBITDA helps in identifying company financial health with EBITDA Calculator and with EBITDA we can determine the valuation of a company.
How to Calculate EBITDA
You can use a few different formulas to calculate a company’s EBITDA.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA = Operating Income + Depreciation + Amortization
Components of EBITDA
In business earning is the amount of money a firm makes in a specific period of time normally quarter or year. It is the net income of a company.
Interest in simple words is the percentage amount of money you borrow from a lender or the return earned on investment. The interest can be paid on a monthly basis or annually. The cost of having debt is the interest amount . it is at the top of the principal payment amount.
Taxes include local tax, state tax and federal taxes on goods such as income and property.
Depreciation and Amortization
Things over a period of time deteriorate and depreciation describes the continuous decline of assets over a period of time. The initial cost of assets is also deducted. Tangible assets such as machinery or buildings depreciate in value but intangible assets such as copyrights or patents amortize. An asset is rebated because it loses its value as it ages. Purchasing an asset eliminates some of its value.
EBITDA in business operation
For numerous reasons, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a valuable financial indicator in reviewing firm operations.
1. Operational Efficiency
EBITDA excludes interest, taxes, depreciation and amortization therefore focus core on business operation. This allows a company to a direct assessment of how well a company is generating profits from business primary activities. The operational efficiency of important parameter in business operation and EBITDA Calculator helps in determining them.
2. EBITDA as performance benchmark
EBITDA can be used to track operational success over time. Businesses can analyze the efficiency of their operational strategy and discover patterns in profitability by tracking EBITDA on a regular basis.
3. For comparative analysis
EBITDA is specially used for comparison between different companies or peer industries. It can be used as a metric as comparing operational efficiencies of companies with different capital structures or tax situations.
4. Debt Service Capacity
Debt capacity is defined as the total amount of debt a business can incur. A business takes a debt for many reasons such as boosting production, marketing , expanding capacity or making a new business. However, taking on too much debt can result in damaging consequences. EBITDA is a company indicator of a company’s capacity to service its debt and the EBITDA Calculator does it for you. It computes the debt service coverage ratio. It is an indicator of a company earning enough to meet its debt commitments.
5. Investment Decision
It is a valuable metric when businesses are considering investment in new projects or expansions. It provides an insight on business potential profitability of core business operations and helps in finding the return on investment.
6. Performance measurement
EBITDA is sometimes used as a management performance statistic. It enables executives to analyze how successfully they are running the operational side of the firm by focusing on profitability before interest, taxes, and non-cash expenses are deducted.
7. Cash Flow Proxy
It is an indicator of company cash generating capacity as it excludes non cash expenses like depreciation and amortization. It is not a measure of cash flow but used as a proxy for operational cash flow.
EBITDA is a useful business indicator of operational success. It is not alone used but in conjunction with other financial indicators of a complete picture. It has some limitations such as accounting for changes in working capital or capital expenditure.