EBITDA. What it is, how to calculate and analyze it

EBITDA is the acronym used to determine a company's earnings before interest, taxes, depreciation and amortization. In some international accounting standards it has also been referred to as EBITDA.

What is EBITDA?

EBITDA is the calculation made in a company's income statement to determine the gross profit from sales, from which operating expenses, i.e. marketing and administrative expenses, are deducted.

Another way of representing EBITDA is to consider it as the company's earnings before interest, taxes, depreciation and amortization. 

In other words, EBITDA comprises the profit obtained by the company from the sales of its main activity, net of sales costs and also of expenses related to these sales.

Why is it important for companies?

EBITDA is a measure of a company's earnings from its core business. 

It is directly related to activity costs, for example: material and input costs, direct labor costs and indirect manufacturing costs. 

But it is also related to indirect expenses, such as those associated with the marketing of goods and services, and those related to administrative expenses necessary for the operation of the company.

Related content

• Economic and financial management of a company
• Financial ratios. What they are and what types exist
• Financial Risks: What are they, types and how to manage them?

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How to calculate EBITDA?

In order to calculate EBITDA, it is essential to visualize the company's complete Income Statement and analyze the information it provides for subsequent analysis and interpretation.

Analysis and Interpretation

EBITDA is an essential measure of a company's health in relation to its core business. It is the measure that can determine whether a company should continue to operate or discontinue its activities.

A negative EBITDA probably indicates that the company is facing structural problems in its core operating costs and expenses directly related to the activity. This result represents a warning to third parties that they should consider continuing to do business with the company or terminating their business relationships with the company.

Every economically healthy company should have a positive EBITDA and, if possible, with a good margin that will allow it to meet other expenses without affecting the company's final result for the year or its annual profitability. 

In conclusion, EBITDA is the first internal and external alert regarding the situation of the company's main operations, and determines whether or not the company is profitable from the point of view of the object of economic activity. 

Differences with EBIT

The following are the three most important differences between EBIT and EBITDA. EBIT and EBITDA, as indicators of operating profitability, analyzing the company's income statement as a whole.

The ideal is to analyze these values horizontally for the company over time, that is, for at least five consecutive fiscal years. These values can also be compared with those of other companies in the sector and in jurisdictions with similar levels of activity.

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