EBITDA

Earnings before interest and tax/earnings before interest, tax, depreciation and amortisation. EBITDA is supposed to be the purest measure of economic return by a company, the least distorted by accounting techniques or factors specific to local tax law.

EBIT is a measure of a firm’s profitability excluding interest and income tax expenses. It is often referred to as operating income as it represents a firm’s fundamental earnings  potential without looking at its financing structure.

EBIT = Sales – expenses (including depreciation) + interest paid – interest received

EBITDA is an abbreviation for a company’s earnings before interest, taxes, deprecation and amortisation.

EBITDA = Sales – expenses (including depreciation) + interest paid – interest received + depreciation + amortisation

Depreciation and amortisation measure the consumption of the value of tangible assets (in the case of depreciation) and intangible assets (in the case of amortisation). That is, if an asset worth CHF 1000 is depleted or ‘used up’ over the course of 10 years, its depreciation expense would be CHF 100 per year (under a straight-line method of calculation).

Thus depreciation and amortisation are measures of capital expenditures (investment in a company’s assets).

By adding depreciation and amortisation, EBITDA focuses on the profitability of a company without considering the investment required to achieve this profitability.

EBIT/EBITDA margin: The EBIT and EBITDA margins are profitability ratios calculated by dividing EBIT or EBITDA by sales revenues.

EBITDA margin = EBITDA / sales revenue

EBIT margin = EBIT / sales revenue

These ratios measure a company’s operating profitability. They indicate the percentage of a company’s revenues remaining after it covers its operating expenses. The higher this ratio, the more efficient the company is in keeping certain expenses low, and therefore the more profitable it will be.

As with other financial ratios, these margins should be compared between companies in related industries since different industries have different cost structures.