What is EBITA?
Definition: Earnings Before Interest Taxes and Amortization is an earnings financial metric commonly used to compare businesses within the same business line.
In its purest form, it is a measure of a firm’s profitability while excluding taxes, interest, and amortization.
Earnings Before Interest, Taxes, & Amortization Explained
Analysts, as well as professional investors, consider EBITA as a more accurate measure of a company’s underlying operations when it comes to generating earnings. This is in part because the measure removes from the equation all taxes owed as well as interest on underlying debt as well as the effects of amortization
Conversely, EBITA provides an accurate representation of the amount of free cash flow within a company’s books of accounts. The cash, in this case, can be used to pay off dividends or carry out buybacks as a way of returning value to shareholders.
EBITA excludes all items that have significant influence on the operating success of a business in its calculation. The figures are excluded as they do not provide accurate information as to how a business performed in a given period.
However, EBITA is not commonly used, as is the case with EBITDA, which also excludes deprecation in ascertaining earnings. EBITA does not exclude depreciation, which is essentially the amount of value lost on fixed assets over time. Therefore, EBITA is not an ideal profitability metric in big utility manufacturing and telecommunication companies that incur significant expenditures in equipment and infrastructure.
EBITA Formula
To calculate EBITA, one must ascertain Earnings Before Interest Taxes and interest. While the figure normally appears in the income statements, it is also possible to calculate it
EBIT = Revenue- Cost of Goods Sold- Operating Expenses
Conversely: EBITA= EBIT+ Interest Expense+ Amortization Expense
EBITA strives to replace the EBITDA metric when it comes to valuing large companies with large capital expenditures. Unlike EBITDA, EBITA takes into consideration depreciation that might occur on fixed assets in calculating the underlying profitability.
EBITA Examples
Company ABC, with operations in the automotive industry, generated $300,000 in revenues and a net profit of $195,000 in the first quarter. In a bid to ramp up operations and increase revenues in the second quarter, the company took a loan to purchase new equipment to ramp up the production of car spare parts.
The purchase of the new equipment allowed the company to ramp up the production process leading to the production of more spare parts. Conversely, the company generated more sales to a tune of $500,000; however, net profit shrunk to $191,000.
By calculating EBITA, one can be able to ascertain the reason behind the sluggish increase in profits in the second quarter. Assuming the cost of good sold in the first and second quarter remained constant Gross margin will be
| Company ABC | ||
| Q1 | Q2 | |
| Revenue | $300,000 | $500,000 |
| COGS | $30,000 | $30,000 |
| Gross Margin | $270,000 | $470,000 |
| Operating Expenses | ||
| Q1 | Q2 | |
| Depreciation | $0 | $50,000 |
| Amortization | $5,000 | $5,000 |
| Other Operating Expenses | $30,000 | $30,000 |
| Total Operating Expenses | $35,000 | $85,000 |
| Other Operating Expenses | ||
| Q1 | Q2 | |
| Interest | $0 | $105,000 |
| Taxes | $40,000 | $89,000 |
| Total Other Expenses | $40,000 | $194,000 |
| Net Income | $195,000 | $191,000 |
| EBITA | $240,000 | $390,000 |
| EBITDA | $240,000 | $440,000 |
EBIT Q1= $195,000+$5000+ 40,000+ $0= $240,000
EBIT Q2= $191,000 + $5000+ $40,000= $390,000
EBITA Analysis
Earnings Before Interest Taxes and Amortization is an important financial metric in measuring profitability where measures such as gross revenue and net income can be misleading. Conversely, the measure provides an accurate representation of profitability by excluding costs of capital expenditures.
The financial metric finds great use in valuing companies in industries that require large investments in the form of fixed assets. It is not advisable to use a metric such as EBITDA in such high capital intensive industries, given that it excludes large amounts of depreciation.
Similarly, EBITA provides a sure way of ascertaining the real value of a company’s earnings or profitability. The measure also includes the cost of aging assets while excluding financing costs associated with them.
Summary
EBITA is a financial metric that affirms a company’s operational profitability by including equipment costs and excluding costs of financing an underlying debt. The metric is often used to ascertain the company’s earnings and profitability.