See Also:
EBITDA Definition
EBITDA Valuation
EBITDA Formula
In order to completely understand the concept of EBITDA, an intelligent idea is to visualize the formula concept. The EBITDA calculation formula can be expressed as follows:
EBITDA = Revenues – Costs (excluding interest expenses, taxes, depreciation, and amortization)
or, if a person wants to view EBITDA in terms of the excluded expenses listed above, another way to calculate EBITDA is:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA Ratio Analysis
EBITDA is often used in accounting ratios that are used to compare the profitability of different companies in the same industry. It is important to have a preferable EBITDA so that you can make positive estimates about your company for the future. At the same time, it is just as important, if not more so, to have a positive EBITDA for outside observers. One example of a ratio being used to compare profitability is the EBITDA margin ratio, which is calculated as:
EBITDA Margin Ratio = EBITDA/Sales
The idea is that excluding interest, taxes, depreciation, and amortization gives a clearer picture of a company’s operating performance. More specifically, the calculation of EBITDA allows the company to be viewed with no strings attached; essentially the skeleton and necessary structure functions and costs of the company. EBITDA is also used to measure the ability of a company to service its interest bearing debt, through the use of the EBITDA coverage ratio, which is calculated as:
EBITDA Coverage Ratio = EBITDA/Debt Service
EBITDA Valuation
Companies are often valued using a EBITDA valuation multiple. The enterprise value of a company is calculated using a multiple of its annualized EBITDA. This is usually expressed as:
Enterprise Value (EV) = Multiple * EBITDA
where the multiple is derived from an average of comparable transactions in the company’s industry. To use this method to value a company’s equity, the company’s total debt less cash (known as net debt) is subtracted from its enterprise value:
Equity Value = Enterprise Value - Total Debt - Cash