EBITDA: Definition, Benefits and How to Calculate It

In the field of accounting or finance there is what is known as EBITDA. Do you know what EBITDA is? Indeed, the use of this term is rarely heard, especially if you are not part of the company's finances.

To understand more about EBITDA, see the following information!

What is EBITDA?

Quoted from Investopedia, EBITDA is earnings before interest, taxes, depreciation and amortization. 

EBITDA is also a measure or metric of a company's overall financial performance and is used as an alternative to net income in some financial situations.

Then, what ratio does EBITDA include? EBITDA is included in the valuation ratio, which is an assessment of the company's ability to generate profits and also operating cash.

What does EBITDA stand for?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

In addition to EBITDA, there is also what is called EBIT, namely: Earnings Before and Taxes. So that the meaning of EBIT is income before taxes and interest which is a measure of profit or the company's ability to make profits.

Then, what is the difference between EBIT and EBITDA? EBITDA is a metric of a company's overall financial performance and is used as an alternative to net income in some financial situations. While EBIT is usually used to calculate income that has been reduced by the amount of expenses, but has not been deducted by interest and taxes.

Besides, meaning after before in EBITDA is the formula that is calculated, EBITDA is profit calculated before interest, taxes, depreciation, and amortization. Meanwhile, EBIT is income before taxes and interest.

Is EBITDA the same as gross profit?

Actually there is no significant difference between EBITDA and profit, it's just that the difference between the two is in non-cash charges. So, in gross profit, depreciation and amortization are calculated. Meanwhile, the financial part of EBITDA is not included.

What goes into gross profit? Gross profit is calculated after deducting COGS (cost of goods sold) or expenses.

4 Elements of EBITDA

In calculating EBITDA, there are 4 elements that you must know, namely:

1. Interest expense or interest

Interest expense is one of the business expenses that usually comes from unpaid loans or debts. However, sometimes interest expense is rarely included in the calculation of EBITDA, because each company has a different capital structure as well as the interest expense earned.

2. depreciation (depreciation)

Depreciation is the cost of depreciation of all company assets as long as these assets can still be used or have an economic life.

Usually depreciation costs are also based on assets that have a physical form, but do not deny if assets are intangible such as patents.

3. Tax

The third element in EBITDA is taxes which are mandatory fees paid by individuals or companies to the state. The amount of tax will also vary depending on the region where the company is located.

4. Amortization (Amortization)

Amortization actually has similarities with depression, namely the decrease in the depreciation value of the assets owned by the company. However, amortization places more emphasis on intangible assets such as patents. Amortization and depreciation are affected by the usefulness or economic value of an asset, the salvage value, and also what depreciation method is used.

How to calculate amortization?

Previously you need to calculate the number of installments first, the formula for the amount of installments is Principal x (Interest rate : 12 months) / 1 - (1 + (interest rate /12 months) - loan term).

After that you can create a worksheet in spreadsheet, calculate the amount of installments and interest.

The next step is to calculate the principal installments, Principal Installment = Total Installment - Interest Installment.

The final count is to calculate the loan balance, Loan Balance = Previous Month's Loan Balance - Principal Installment.

How to calculate EBITDA

EBITDA formula or EBITDA formula can be used in two ways, the first way is:

EBITDA = Operating Profit + Amortization Cost + Depreciation Expense

For example, company ABC has an amortization cost of Rp. 30 million, an operating profit of Rp. 300 million, and its depreciation expense is Rp. 20 million. So what is company ABC's EBITDA?

EBITDA = IDR 300 million + IDR 30 million + IDR 20 million = IDR 350 million.

In addition to the formula above, you can also calculate EBITDA using the formula below:

EBITDA = Net income + interest + taxes + amortization + depreciation.

What is EBITDA margin?

After knowing the elements and the EBITDA formula, you also need to know what EBITDA margin is.

EBITDA margins is a ratio that reflects the company's profit after obtaining business income which has been reduced by production costs or operational costs. However, depreciation and amortization costs are not included in the EBITDA margin.

The EBITDA margin formula is the result of calculating EBITDA divided by operating income, and later written in percent (%).

EBITDA Benefits

Well, maybe you are still wondering what are the functions and benefits of EBITDA in finance? Here are the benefits that you can find from the EBITDA calculation.

1. As a comparison of profit value

With the EBITDA calculation, you can analyze and compare the profit value of companies and industries.

2. Company Evaluation

EBITDA calculation can also be used to view and evaluate the profit or profit of the company. However, EBITDA is not taken into account cash flow.

So, that was a summary regarding the definitions, elements, formulas, and also the benefits of EBITDA. Indeed, this calculation does not enter into cash flow, but there is nothing wrong with a company having an EBITDA calculation.

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