As of January 2023, India has over 1.51 million registered companies, highlighting the upward growth of the country’s business sector.
EBITDA is a significant financial metric for interested citizens, investors, and analysts to navigate the business landscape in India. It is a direct measure of a company’s operational performance and helps assist in overall evaluation.
Keep reading to learn about EBITDA’s meaning, what goes into calculating it, and the top benefits of calculating it for your business.
What is EBITDA?
EBITDA is the short form for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Here is a detailed breakdown of each aspect:
- Earnings – The net income or profit generated by your business before deductions.
- Interest – Any interest being paid against borrowed money for business operations.
- Taxes – Monetary compensation paid to the government based on your business’s profits.
- Depreciation – Reflects the gradual wear and tear costs of tangible assets like machinery, equipment, etc.
- Amortization – Reflects the costs of using different non-tangible assets like trademarks, software, etc., over time.
It represents your company’s operational profitability before integrating the non-cash expenses, tax implications, and financing decisions into the earned revenue. Simply put, EBITDA is a direct calculation of your company’s profitability or core profit value without deducting, including any interest on debt, asset depreciation or amortization, taxes, and other external factors from the gross profit.
The key difference between your revenue and EBITDA is that EBITDA is your business’s total income after excluding operational expenses. Your business revenue, however, is your business income before excluding the operational and other costs.
Other than calculating EBITDA, some other variations within this financial metric include the following –
- Earnings before interest after taxes – EBIAT
- Earnings before interest and taxes – EBIT
- Earnings before interest, depreciation, and amortization – EBIDA
- Earnings before interest and depreciation – EBID
- Earnings before interest, tax, depreciation, amortization, and exploration – EBITDAX
- Earnings before interest, tax, depreciation, amortization, and rent costs – EBITDAR
- Earnings before interest, tax, depreciation, amortization, rent costs, and management fees – EBITDARM
Formulas for Calculating EBITDA
After understanding EBITDA’s meaning, it is necessary to know how it is calculated. There are two ways of calculating EBITDA, one using net income and the other using operating income. Let us look at each of the formulas below.
- Formula 1
Net Income/Profit + Taxes + Interest Expense + Depreciation and Amortization
- Formula 2
Operating Income + Depreciation + Amortization
Important calculations for using these formulas are –
- To calculate net income/profit, you must subtract the non-operational expenses from the operating income.
- To calculate the operating income, subtract the costs of goods sold from the total revenue.
Formula 1 – Calculating EBITDA Example
For the first example, let us assume you are a bakery owner. Here are the financials for your company.
| Components | Value (in ₹) |
| Revenue | ₹5 lakhs |
| Cost of goods sold | ₹3 lakhs |
| Profit | ₹2 lakhs |
| Operating Expenses (rent, salary. etc.) | (₹80,000) |
| Operating income (profit – operating expenses) | ₹1.20 lakhs |
| Depreciation expenses | (₹20,000) |
| Amortization expenses | (₹5,000) |
| Interest expenses (from loan for expansion) | (₹15,000) |
| Non-operating expenses | (₹25,000) |
| Taxes | (₹24,000) |
| Net Income {operating income – (non-operating expenses + taxes)} | ₹31,000 |
Using formula 1, the EBITDA for your bakery is as follows.
EBITDA = Net Income/Profit + Interest Expense + Taxes + Depreciation and Amortization
= ₹31,000 + ₹15,000 + ₹24,000 + ₹20,000 + ₹5000
= ₹95,000
Formula 2 – Calculating EBITDA Example
For the second example, let us assume you are an electronics manufacturer. Here are the financials for your company.
| Components | Value (in ₹) |
| Revenue | ₹10 lakhs |
| Cost of goods sold | (₹6 lakhs) |
| Profit | ₹4 lakhs |
| Operating Expenses (rent, salary. etc.) | (₹1,20,000) |
| Operating income (profit – operating expenses) | ₹2.80 lakhs |
| Depreciation expenses | (₹15,000) |
| Amortization expenses | (₹10,000) |
| Interest expenses (from loan for expansion) | (₹20,000) |
| Taxes | (₹56,000) |
| Net Income | ₹1,79,000 |
Using formula 2, the EBITDA for your manufacturing company is as follows.
EBITDA = Operating Income + Depreciation + Amortization
= ₹1,80,00 + ₹15,000 + ₹10,000
= ₹2,05,000
Other Necessary EBITDA Calculations
EBITDA Margin
EBITDA margin is calculated to determine your company’s operating profit as a percentage of total revenue. The formula for it is as follows.
- EBITDA Margin = (EBITDA/ Total Revenue) X 100
If we apply this formula to the above examples, the EBITDA margin will be as follows:
- For bakery – (₹95,000/₹5,00,000) X 100 = 19%
- For electronic manufacturer – (₹2,05,000/10,00,000) X 100 = 20.5%
EBITDA Interest Coverage Ratio
The EBITDA coverage ratio is calculated to determine your company’s financial capabilities. It assesses whether your company’s income before tax is sufficient to cover debt obligations. The formula is as follows.
- EBITDA Interest Coverage Ratio = EBITDA/ Interest
If we apply this formula to the above examples, the EBITDA margin will be as follows:
- For bakery – (₹95,000/₹15,000) = 6.33
- For electronic manufacturer – (₹2,05,000/₹20,000) X 100 = 10.5
Top Benefits of EBITDA
- EBITDA provides a close estimated valuation of your company’s cash flow, allowing you to assess your financial freedom with proper evaluation.
- EBITDA helps you compare profitability between your company and its competitors. It also helps compare profitability between industries.
- EBITDA accounts for your business or company’s short-term operational efficiency.
- EBITDA assists equity investors and professional buyers in purchase and acquisition decisions.
- EBITDA indicates your business’s ability to repay loans and other debt obligations.
Conclusion
Calculating EBITDA is necessary to analyze your company’s financial operational performance. Moreover, it is crucial to monitor your financials to ensure accurate EBITDA calculations.
For future capital growth that will impact your company’s EBITDA, you can explore stock purchases after understanding the basic stock market rules. There is no direct correlation between investments and EBITDA.
However, some investments, like long-term investment stocks, might help increase your company’s financial flexibility. For added assistance, you can consult a SEBI-registered advisory.
*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
FAQs
Is EBITDA the same as gross profit?
EBITDA is not the same as gross profit. Unlike gross profit, EBITDA measures profitability, including operating expenses, which only accounts for direct costs of goods sold.
Is EBITDA a profit or revenue?
EBITDA measures profitability, not revenue. It calculates a company's earnings before deducting interest, taxes, depreciation, and amortization expenses, offering insight into operational performance.
Are EBITDA and Net Income the same?
EBITDA and net income help measure your company’s earnings after removing the expenses. However, EBITDA considers the earnings before taxes, interest, depreciation, and amortization. On the other hand, net income considers total earnings after removing only the cost of goods sold.
What are some disadvantages of EBITDA?
Inaccurate representation of your company’s cash flow as it uses estimations.
EBITDA does not provide the most accurate picture of your company’s financial position.
It can be used to mislead investors by covering the actuals.What is considered a good EBITDA?
EBITDA over a score of 10 is considered good. The simple rule is that the higher the score, the better for your business.
What is the difference between calculating adjusted EBITDA and EBITDA?
While calculating EBITDA, operating income and recurring expenses are taken into account. However, while calculating adjusted EBITDA, operating income, and recurring expenses, you may add or remove some non-recurring expenses.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.