EBITDA

EBITDA what it is, where to find it in your accounts and why it matters..

Earnings Before Interest Tax Depreciation & Amortisation

There’s a video below below showing you how & where to find it in a set of accounts… but first I’d like to explain why EBITDA is so important…

The finance community use it to compare your performance over time and with others…

… that’s it…

And to do that they need as clean a sense of your profits (earnings) as they can get…

So… they want a profit figure Before :

Interest

Because Interest is a function of capital structure… (some companies have debt, some don’t)… to compare performance between companies we want a profit figure that ignores a company’s capital structure…

Tax

Tax regimes around the world (and even across industrial sectors) can be / are different… so to compare performance between companies we want a profit figure that ignores Tax

OPERATING PROFIT

Ignoring Interest & Tax gives us your EBIT (Earnings Before Interest & Tax)… in a UK set of accounts you’ll find EBIT as Operating Profit in the Profit and Loss

Depreciation

Finding EBIT is easy… but now we have to dig around the accounts to find the ‘Depreciation charge for the year’ and add that back to the Operating Profit…

Why ? Because Depreciation is a book-keeping entry based on a policy decided by the company’s directors… one company might depreciate its assets (say vans) at 25% pa… another at 33%… which can affect profit dramatically

To compare performance between companies we want to ignore such a moveable / arbitrary / manipulable number

Amortisation

Fancy, old fashioned word for Depreciation of an Intangible Asset (such as Goodwill)… and as with Depreciation it needs to be added back if we want to compare company performance

EBITDA… There you have it

A universally used metric to measure performance… that you can’t find…

… you have to work it out… by :

  1. finding Operating Profit (from your P&L)
  2. adding back Depreciation & Amortisation (which you’ll find in the notes to your accounts… it’s the ‘charge for the year’ in the Fixed Asset (Non-Current Asset) table