EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It is commonly used as a metric for valuing a company in a leveraged buy-out and for measuring cash flow in some industries. EBITDA margin is a measure of profitability. In much the same way that profit margin is calculated by dividing profit from the total revenue, EBITDA margin is a metric that divides EBITDA by total revenue.
- Skill level:
Things you need
- All of a company's accounting records
- A calculator or spreadsheet
Gather all the accounting information for the company whose EBITDA you wish to calculate for the period over which you wish to calculate it.
Determine the total earnings for the company, then add in interest, taxes, depreciation or amortisation. These are ordinarily subtracted from earnings but here we wish to add them back in.
Divide the EBITDA by the total revenue to determine the EBITDA margin.
When comparing an EBITDA margin or EBITDA multiples, it is helpful to look at a specific industry. Some industries such as retail have vast amount of sales with relatively small EBITDA margins whereas software companies might have high EBITDA margins. This is more a result of the nature of the industry than a factor specific to a given business.
Tips and warnings
- A similar metric is EBIT which stands for earnings before interest and taxes. This is similar to EBITDA with the only difference being that depreciation and amortisation are left in. If a company has purchased a lot of expensive long-lasting equipment years in the past then this might make the company look less profitable than it is due to depreciation or amortisation. However, this doesn’t apply to all companies so sometimes EBIT is used. It is also possible to calculate an EBIT margin.
- EBITDA multiples is another method for valuing companies. In a given industry, companies might have similar EBITDA multiples. A buyer in a leveraged buy-out might wish to pay a certain multiple of the total EBITDA. For example a company might have an EBITDA of £780,000. If the industry EBITDA multiple is 5 the buyer might wish to pay in the vicinity of £3,900,000 for the company.
- Generally Accepted Accounting Principles (GAAP) do not recognise EBITDA as a measure, which means companies have a lot of discretion when calculating EBITDA and it can change from one period to the next. Taken alone, EBITDA can be a misleading figure because it leaves out a lot of cash expenses which are necessary to run a business.
- Taking total profit, earnings, or profit margin by itself can be misleading when valuing a company. This is because often things like interest and taxes will change if a company is bought out and the structure of its ownership is altered. For example a company might be heavily in debt and making money but this may not be visible in the reported earnings because money that would be profit goes towards interest on the debt that the company has accrued.
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