EBITDA: Everything you need to know about this key metric

EBITDA is one of the most widely used financial metrics for assessing a company's economic performance. In this article, we explain what it is, what it is used for, how it is calculated, and what limitations it has when interpreting results.

 

What is EBITDA?

E -> Earnings

B -> Before

I -> Interest

T -> Taxes

D -> Depreciation

A -> Amortisation

It is a key financial indicator used to measure a company's operating performance before considering the effects of interest, taxes, depreciation, and amortisation. This provides a clearer view of the pure performance of the business, without external or accounting factors.

 

What is EBITDA used for?

• Operating cash flow assessment: This allows you to analyse the company's ability to generate cash exclusively from operations, excluding non-operating factors. This provides a clearer picture of the actual performance of the business.
• Profitability comparison: Evaluates a company's performance relative to its competitors, helping to identify whether it is above, in line with, or below industry standards.
• Company valuation: Facilitates the estimation of a company's economic value. A high EBITDA is often interpreted as a sign of operational strength, which can increase interest from investors and lenders.

 

How is EBITDA calculated?

To calculate EBITDA, we start with the company's final result, i.e. its profit after tax. From this result, we then add financial expenses, taxes, depreciation and amortisation.

Formula:

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation

 

EBITDA vs. EBIT vs. Net profit

Although EBITDA is very useful for analysing operating performance, it is not the only relevant indicator. Below is how it compares with other key measures:

• EBIT (Earnings Before Interest and Taxes): Similar to EBITDA, but includes depreciation and amortisation. It represents operating income before interest and taxes, reflecting operating performance taking into account the wear and tear of assets.
• Net profit: The company's final result after deducting all expenses, including taxes, interest, depreciation, and amortisation. It is more comprehensive, but does not reflect pure operating performance.

 

Considerations when interpreting EBITDA

• It is not a cash flow: It does not reflect collections or payments, so it does not measure the actual cash generated by the company.
• Does not consider debt: High EBITDA may not be positive if the company has high financial leverage.
• Ignores amortisation and depreciation: It does not take into account the investments in productive assets necessary to maintain operations.
• It must be supplemented with other metrics: To obtain a complete picture, it is essential to analyse EBITDA alongside other financial metrics such as cash flow, EBIT, and net profit.
• Analysis over time: It is essential to evaluate EBITDA over several periods to identify trends and anomalies.
• It does not distinguish between the quality of income: It does not differentiate between recurring and non-recurring income, so results inflated by one-off income may give a distorted picture of actual profitability.

 

The true scope of EBITDA

EBITDA is a valuable metric for analysing a company's operating profitability, as it eliminates the effect of financial, tax or accounting factors. It provides a clear basis for comparing businesses and assessing their performance, especially in the context of investment or company acquisitions.

However, it should not be interpreted in isolation. It can offer a partial view if not complemented by other key metrics such as EBIT, net profit or operating cash flow. Its true value lies in its combined use within a broader and more contextualised financial analysis.