EBITDA - what is it in simple terms? EBITDA in investments (formula, calculation)

For a business, starting any international activity, such as trying to get a loan from a bank in another country, attracting foreign investors or entering new markets, means a lot of changes that both the business owner and his employees will have to face.

In many ways, these changes relate to accounting - financial reporting standards that differ from Russian ones are used abroad. Accordingly, other indicators are used to evaluate the company’s performance, and the success of the enterprise’s international activities largely depends on whether the accountant can correctly calculate and analyze them - after all, a potential foreign investor or lender, wanting to know the capabilities of the company and the efficiency of its work, will require those indicators with whom he is used to working.

One of these indicators is EBITDA. And to the question “what is EBITDA?” Our article will answer in simple language.

Concept

EBITDA - what is it and how to calculate it? First, let's give a definition that you may have already seen in various reference books or on Wikipedia.

EBITDA is an analytical indicator showing the amount of profit of an enterprise without taking into account the cost of paying interest on loans, income tax and depreciation charges. This is exactly what this abbreviation stands for: Earnings before Interest, Taxes, Depreciation and Amortization.

This profit is calculated on the basis of accounting documents that comply with either the American standard US GAAP or the regulations of the International Financial Reporting Standards (or IFRS for short).

If desired, EBITDA can also be found using a balance sheet prepared according to the rules of RAS . You will learn further about how to do this.

So what does this indicator reflect?

With the help of EBITDA, we are able to evaluate the comparatively “pure” efficiency of the company for the reporting period, without taking into account the peculiarities of the tax system of the state in which the company operates, its debt load and non-cash accounting items.

This way we can demonstrate the cash flow of any business.

That is why this indicator is so popular among Western investors, banks and financial analysts, although it does not apply to IFRS or US GAAP standards, but is only calculated on the basis of documentation created in accordance with these regulations. EBITDA allows you to well assess the attractiveness of a company for its acquisition, issuance of a loan or investment. In addition, it is calculated quite simply and quickly, which is another advantage, but for accountants.

But every coin also has a downside - when calculating this indicator, the real state of affairs of a particular enterprise may be distorted. This is largely due to depreciation charges - in some industries, the costs of purchasing and modernizing fixed assets (equipment, infrastructure and buildings) can have a significant impact on profit.

But you can lose sight of this point if you evaluate a company's performance only by EBITDA.

And then, after taking over a company or investing in its activities, you discover that, due to the specifics of the industry to which the enterprise belongs, it requires huge funds to update and improve the means of labor, and for this reason the expected profit will be significantly less.

Therefore, EBITDA is good for a “first acquaintance” and a quick assessment of a company, but further activities will require you to conduct a more in-depth analysis of the company’s performance and prospects for its development.

However, it is worth repeating that, despite the above drawback, it does a good job when assessing a company's ability to service debt or when benchmarking - comparing a company's performance with benchmarks and comparing it with other enterprises in the same field of activity.

It should be remembered that EBITDA, due to its quick calculation, is a “rapid test” of a company’s solvency, which is used by some foreign banks.

Therefore, if your company plans to take out a loan abroad, then it is imperative to calculate and analyze it.

Pros and cons of EBITDA:

Pros:

● EBITDA very accurately reflects the “cash profit” from the company’s main activity;

● EBITDA can be used in credit and financial analysis, in addition to company valuation;

● Using it, you can assess how much a company can service its debt;

● Not subject to manipulation in internal reporting items.

Minuses:

● Difficulty in calculating EBITDA;

● Each company calculates EBITDA in its own way, which makes it difficult to compare companies with each other;

● EBITDA does not reflect the company's future investment needs.

Types of indicators

In addition to earnings before interest, taxes and depreciation, there are its derivatives, designed to clarify some points that arise when assessing the attractiveness of a company for issuing a loan or for taking over someone else's business.

First, let's talk about EBITDA margin.

You can read below about how to calculate it and why it is needed.

The next derivative indicator is the debt to EBITDA ratio. It represents the ratio of all debts (and those with a maturity of up to 12 months or more) of the company to the profit we calculate. The meaning of this indicator is to demonstrate the level of debt burden on the company and its ability to service these obligations.

A good ratio (also known in English literature as Debt/EBITDA) is 3 or less. If the value is more than 4-5, then the company is experiencing difficulties servicing its own debts.

Based on it, two more EBITDA derivatives can be distinguished:

Net Debt/EBITDA is the ratio of net debt (the totality of all the company's liabilities, minus its cash and cash equivalents) to EBITDA.
EBITDA / Interest expense is the ratio of this profit to interest expense or, in simple words, to the overpayment on the loan.

Property tax is a regional tax. How to calculate corporate property tax – tax base, rates, payment deadlines.

An example of property tax calculation and payment methods is given here.

Calculation formula

Now let's determine how this indicator is calculated.

The first way to do this is to calculate EBITDA based on financial statements created in accordance with IFRS regulations. The formula for calculating EBITDA in this case looks like this:

EBITDA = Net profit + Income tax – Tax deductions + Non-operating income and expenses + Interest payments + Depreciation deductions (i.e. depreciation) – Revaluation of assets.

The main advantage of this formula is the accuracy of the calculation. In addition, with this method of calculation, you always have the opportunity to present to interested parties or organizations not only EBITDA itself, but also its components in a form that is understandable to them. But for accountants who have not previously had experience working under US GAAP or IFRS regulations, working with this formula and its elements will present some difficulty.

Therefore, there is an alternative way to calculate EBITDA, which uses items from the “Profit and Loss Statement” and the balance sheet prepared in accordance with RAS. With this calculation method, the formula takes the following form:

EBITDA = Revenue – Cost + Tax deductions + Interest payments + Depreciation deductions.

As for the items of Form No. 2, revenue and cost can be found in lines 2110 and 2120, respectively, taxes are calculated based on lines 2410, 2421 and 2450.

And the amount of interest payments on loans is located in the profit and loss statement in line 2330.

Depreciation charges should be found using balance sheet data.

With this method of calculating profit, the situation becomes reversed - it is much easier for a domestic accountant to calculate EBITDA in this way, but the accuracy of the calculation also decreases, since the lines of Form No. 2 and the balance sheet items differ from the elements of EBITDA determined on the basis of IFRS. Which of the two methods you prefer is up to you.

Despite the ease of calculating EBITDA based on a balance sheet, it makes sense to spend more time and effort and prepare reports according to IFRS standards (or US GAAP if you are working with US companies, banks and investors).

Remember that in addition to calculating the above profit, you may need reporting for other purposes related to doing business abroad.

Where to look for multipliers

The most reliable method for finding multiplier values for a particular company is to do it yourself. In this case, the financial statements of the issuer are taken as a source of data. However, this is an extremely time-consuming method. Most investors use various Internet services, at least for the initial assessment. Some of these resources include:

smart-lab.ru;
blackterminal.ru – information about multipliers is available only in the paid version, but it also includes data on US companies;
tezis.io;
Bloomberg.com (authoritative English-language site);
financemarker.ru (most of the functions are paid), etc.

Such services make it possible not only to compare multipliers, but also to study excerpts from company reports and save time searching for this information on official websites. However, you should not rely solely on their data for in-depth analysis. They may be unreliable or misrepresented.

I also recommend reading:

How an investor can use the reporting calendar

Why is the reporting calendar so important for investors?

For example, in the SmartLab bubble chart showing the ratio of companies by EV/EBITDA and Debt/EBITDA multiples, some companies may be among the leaders. If an investor studies the information not in graphical form, but in tabular form, he may not find these issuers on the list. Therefore, you should compare information from different resources. And before making the final decision to purchase company shares, check the numbers with your own calculations.

EBITDA margin

Opening an account and 1 year of service 0 rub. 4% on the balance for everyone. 5.5% on the balance for medium and large businesses. Bank "EnergoMashBank" - www.energomashbank.ru

Now let's return to the indicator mentioned earlier. So, EBITDA margin is its ratio to sales revenue. Let's imagine its formula:

EBITDA margin = EBITDA/Revenue

What does this indicator tell us? It demonstrates the profitability of a business, not adjusted by the peculiarities of the tax collection system of a particular state or the debt load of this company.