The Income Statement (DR) provides information on the company's activity and its results. The information can be organized and complemented in order to make a more detailed economic and financial analysis. It is in this context that it is important to analyze EBITDA, what it is, the calculation formula and examples to help you understand.
Estimated reading time: 4 minutes
Table of Contents
Statement of Operating Income
Let's take as an example the Income Statement account that we arrived at in review and simulation of business strategies, as follows
EBITDA what is it
For the purpose of a more detailed analysis, the Income Statement may present the following more detailed configuration, which is shown in the model below.
EBITDA, an acronym for the English expression “Earnings Before Interest, Taxes, Depreciation and Amortization” It is a very important indicator as it allows us to understand the profitability of the business, in the most operational aspect.
In Portuguese, it is common to find the acronym RAJIDA, meaning “Earnings Before Interest, Taxes, Depreciation, Amortization (and Provisions)”.
Thus, this indicator does not take into account asset depreciation, which may be faster or slower, nor financial charges and taxes. This allows you to discover what value you are creating in your productive activity.
It therefore gives a more effective indication of the productivity of the operating process and how its competitiveness and efficiency are evolving over time, in particular compared to competitive indicators.
Note that EBIT (RAJI) = RE if there are no extraordinary exploration results.
Importance of EBITDA
Earnings Before Interest, Taxes, Depreciation, Amortization and Provisions – EBITDA allows you to know whether the company makes a profit or a loss, only considering the productive or operational part of the business.
It is therefore a valuable indicator of profitability.
However, it must be complemented with other indicators, such as net income (NR), financial autonomy, the return on assets, equity and the sales plan, Among others.
One of the great advantages is being able to compare the company's EBITDA with other companies in the same market and analyze its evolution over time.
It also allows for comparisons with companies in the same industry in different countries, as taxes and interest, which are different in each country, are not taken into account when calculating EBITDA.
EBITDA calculation
To calculate EBITDA, the formula is to add to the net result, that is, the end of the Income Statement, taxes, financial expenses (interest) and depreciation, amortization and provisions of the exercise.
EBITDA, the formula
EBITDA = NR + Taxes + Interest + (Depreciation + Amortization + Provisions)
In the interest portion, all financial charges, such as interest payments and financial discounts, must be considered.
EBITDA, calculation example
Putting the values of the Income Statement referred to in the Table above,
EBITDA = €10.051 + €2.723 + €0 + €3.658 = €16.432
EBITDA Advantages and Disadvantages
We have already seen what EBITDA is. Now let's see a summary of its advantages and disadvantages:
Benefits,
- It allows determining the productivity and efficiency of the business, as it does not consider financing and accounting effects.
- The evolution of EBITDA over the years shows the ability to improve production processes.
- Comparing the values of different companies, it provides an analysis of competitiveness, as it removes the impacts of financing costs, which in some industries, heavy and technological, are normally high.
- It also allows comparing the performance of companies in different countries, as the effect of local factors such as taxation are not included in the indicator.
Disadvantages,
- A positive EBITDA can hide losses in the company.
- Therefore, it needs other indicators so that they can show the financial part of the company.
Note that there is a difference between EBITDA and EBIT. EBITDA does not include amortization and depreciation costs (and provisions) while EBIT considers them.
EBITDA = EBIT + Depreciation and Amortization
That is, EBITDA does not consider the value of tangible assets (equipment, for example) and amortization of intangible assets (for example, brands, patents, software, customers).
Thus, as mentioned, the indicator shows the ability to generate cash flows, considering only the company's main activity.
It is therefore important to incorporate this information into the business plan.
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