What is EBITDA?

EBITDA

What is EBITDA?

EBITDA stands for Earnings before Interest, Tax, Depreciation and Amortization. It is an indication of a company’s raw earnings from its operations and therefore, it is also termed as Operating Profit. 

Why is EBITDA important as the financial metric?

The financial performance of a company in any sector is justified by its ability to make profits from its operations. A financially healthy company has always positive cash flows resulting from its operations, and it is from these profits that it decides to give back value to shareholders as dividends and/ or retain some of the profits as cash and reserves for the future growth of the company.

What is EBITDA composed of?

EBITDA represents profits before a company makes interest payments on loans, tax claims to the government and realizes the depreciation and amortization value. 

So, it is not the final profit figure earned by the company in a financial year. 

To seek the true profits earned by a company, we usually analyse the Profit After Tax (PAT)/ Profit for the Year metric as mentioned in the Income statement.

The elements giving rise to EBITDA is as follows:

What can you learn from EBITDA?

It is always desirable that a company reaps its usual profits from its operations because the latter is what builds up a company’s purpose and gives rise to sustainable profits. A company with higher EBITDA will typically suggest to investors that it is earning largely from its operations, and therefore it will have higher and sustainable returns to pay back to investors.  

However, investors should keep in mind that EBITDA is not the truly realized profits of a financial year and may vary drastically from it depending upon the company’s debt burdens, tax obligations and asset depreciation expenses.

We hope this article could give answers to all the questions that you had in mind about EBITDA. But still, if you have any doubt, feel free to ask your question in the comments section below or you can also mail us, we will try to give answers to questions as soon as possible.

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