What is EBITDA?

As part of our promise not to use jargon and acronyms unless we really have to. Here is an explanation of one we sometimes can’t avoid.

EBITDA stands for “Earnings Before Interest, Tax, Depreciation and Ammortisation”

It is a financial metric used for judging company performance, excluding non operational and non cash impacting costs. Effectively what did you do productively with the cash you had available.

Interest and taxes are non-operational costs as they are a by-product of company operations

Depreciation and ammortisation are non-cash costs and do not directly reflect what was achieved with the cash available. They relate to historic decisions that often were made many years before, such as when an asset purchase was agreed

Why is EBITDA important?

EBITDA is important to business owners as it provides a good measure of how mush money is being generated by ongoing operations.

EBITDA is important to lenders and bankers because it indicates how profitable a company is. Also, gives a good indication of funds available to meet financing repayments.

How is EBITDA calculated?

To start you needs to take the company’s sales revenue, and deduct from it the cost of goods sold. This gives you your gross margin.

You then need to take your gross margin you have just calculated and deduct all the business overheads. They are likely to include such as Power & Fuel, Rent, Wages, Insurance and so (please note this is not a complete list of overheads!)

EBITDA vs Net Income

What’s the difference? In calculating EBITDA you don’t factor in Interest, Taxes & Depreciation. Net Income however, is what is left as actual profit once all of the costs are taken into account.

Hopefully you have found this short explanation clear and easy to understand. We will continue to add to our blog to break down the sometimes infuriating acronyms and jargon that float around in day to day business.