1/27/2023 - Economy and Finance

What is EBITDA?

By gustavo neffa

What is EBITDA?

EBITDA is not part of the results state, but it has a lot to do with it. It is simply a construction that analysts do to better understand what was the near-form operating box generation of a company. Investors relations departments include it in their press-releases because it has increased its importance in recent years.

How is EBITDA calculated

Let's see how it's calculated and what it's for later: The state of results is one of the three fundamental states of the balance of a company, along with the state of patrimonial situation and the state of origin and application of funds. In the results state, part of the company's invoicing and, after deducting all costs and expenses, is obtained the operational result, or the business itself, regardless of other side results, of its financial results or of the taxes paid. It is about seeing whether the “core” or central business of a company is profitable or not. Obviously, it has to be enough to compensate for the other expenses below the operating line and generate profit:

We calculate EBIT

Sales/interests (factoring)

- Cost of sold goods

- depreciations and amortizations

== sync, corrected by elderman == Gross value

- Administrative expenditure

- Commercial expenditure

== sync, corrected by elderman == Operating result (or earnings before interest and taxes, EBIT)

EBITDA are the English acronyms of earnings before interest, taxes, depreciations and amortizations. It adds to the operational result obtained previously the depreciations and amortizations that were left in the balance sheet, for the simple fact that they do not represent an erogation of funds, but only an accountancy loss that must be recorded by the use or passing of the time of the fixed assets that were bought at some point. This is the way that exists to better expose the value of the fixed assets (plant, properties and equipment) that actually have.

We calculate EBITDA

Operating result (EBIT)

+ refunds and depreciations

== sync, corrected by elderman == Gains before interest, taxes, depreciations and amortizations (EBITDA)

EBITDA is widely used to evaluate the operational performance of the company, as it gives the dimension of what generates the business itself (its operational result or its normal operations) measured through a 'proxy' of the box generation.

About the concept of an operating box flow because depreciations and amortizations are added. Thanks to the latter, it allows a better comparison between companies with debugging the effect of different tax systems and depreciation and accounting amortization and countries, as well as the financial leverage between companies, since it is about observing the gains before interest, taxes, depreciations and amortizations.

Which is the EBITDA margin

The EBITDA margin is built by dividing the EBITDA by the billing number. It is a measure that analysts tell us a lot about whether the company, for each additional or marginal unit, generates more operational profit in relative terms. Although it is positive that a company produces more profit dollars from one exercise to another, it is more important to further complement this analysis with the EBITDA margin.

How is the margin calculated EBITTED

EBITDA / Sales = EBITDA margin

If the EBITDA margin is achica of a quarterly or yearly exercise, in a sequence or homologous form (if you can make the comparison you want), the company is satisfied because it generated more market share or achieved greater penetration in a given market, being its goal, at the expense of seeing its costs increased more than proportionally. It would be positive if the strategy is of penetration or loyalty more than of generating profitability, if it has the medium or long term in its favor.

When used EBITDA

EBITDA is very much taken into account in the evaluation of the operational generation of businesses that require a great investment, since they are precisely those that more amortizations have to register. By registering these high amounts of fictitious losses, since they are only accounting records that come to amortize in books the use goods it possesses (the erogation of funds through investment has already been carried out previously), the actual operational result, or the concept of box to which we should pay attention would be undervalued. When using EBITDA, we better measure the box operating result, or a proxy of it.

Also remember that sales and costs, as well as expenses, are all accounting concepts: if it is sold to credit for 60 days, for example, as much as a certain product is sold in December of the current year, it will only be charged in February of the following year. But the current billing will record this sale (as much as it has not been charged). This is why EBITDA is also not the operating cash flow, but at least it approaches more than the traditional EBIT.

The industries that are often punished by the use of EBIT are those of intermediate goods manufacturing processes, such as steel, aluminum, petrochemicals, oil, etc. that require high investments and therefore refunds. Telecommunications companies and all industries that need to sink a lot of incoming capital should be seen through EBITDA as well, not through EBIT.

There is no EBITDA in financial institutions, because the concept of EBITDA is a concept or calculation before interests, and the interests are precisely the source of income par excellence of banks and other entities in this sector.

EBITDA is also widely used in the valuation of companies, sectors or countries, since there is a family of multiple evaluators that take it into account in the calculation.

Specifically, the most used is the Enterprise Value / EBITDA, i.e. take the value of the company and compare with the EBITDA it generates. The higher, the more expensive one will find this asset in relation to another in relative terms.

How is Enterprise Value calculated

It is estimated that the capitalization of a company's purse (price for shares, i.e. market size) is the net financial debt of the cash position. Only debts that are of interest to the calculation are taken and the cash position and temporary investments remain, since they do not generate value in the company (or at least should not be their core business, investors can do it individually).

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gustavo neffa

gustavo neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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