EBDITA stands for ‘Earnings Before
Depreciation, Interest, Tax and Appropriations’.
Meaning:
Profits of a company are measured at
various stages or levels to draw certain meaningful conclusions about the
operational efficiency and comparative standing of a company vis-à-vis its
peers, and EBDITA is the first level. It measures the earnings or profits after cost of raw materials and all expenses
other than the following:
- Depreciation
- Interest
- Corporate Income Tax
- After Tax Appropriations or set-asides like towards reserves, dividends, etc.
What is the significance of the EBDITA Measure?
If we want to compare the efficiency of
operations of a few peers operating in the same business space or segment, and
if we adopt a simple comparison of profits after tax, we may be both incorrect
as well as doing injustice as the companies may have cost structures not
directly related to their operational efficiencies.
Example:
For example one plant may be an old one
involving a low depreciation charge over its already highly depreciated plant
while the other one is brand-new plant installed recently at a heavy cost and
therefore attracting a heavy depreciation charge. Similarly, one company might
have setup its plant entirely from own funds and hence bears zero interest
costs while the other may have employed borrowed funds and therefore paying
significant interest costs. Under such circumstances simply comparing the
companies based on ultimate net profit, may lead to erroneous conclusions and
hence the need and significance of measure of EBDITA.
|
|
M/s.Old &
Conservative Ltd.
|
M/s.New &
Extravagant Ltd.
|
|
Sales
|
1500.00
|
1520.00
|
|
All Costs &
Expenses before Depreciation, Interest, Tax and Appropriations
|
800.00
|
810.00
|
|
EBDITA
|
700.00
|
710.00
|
|
EBDITA % to Sales
|
46.67%
|
46.71%
|
|
Depreciation
|
30.00
|
100.00
|
|
Earnings after
Depreciation but Before Interest, Tax and Appropriations (EBITA)
|
670.00
|
610.00
|
|
EBITA % to Sales
|
44.67%
|
40.13%
|
|
Interest
|
0.10
|
70.00
|
|
Earnings after
Depreciation and Interes but Before,
Tax and Appropriations (EBTA or EBT)
|
669.90
|
540.00
|
|
EBT
|
44.66%
|
35.53%
|
|
Corporate Income Tax
|
221.07
|
178.20
|
|
Net Profit or Profit
After Tax (PAT)
|
448.83
|
361.80
|
|
PAT %
|
29.92%
|
23.80%
|
|
Dividends
|
134.65
|
108.54
|
|
Net Profits After
Taxes and Appropriations (PAT&A)
|
314.18
|
253.26
|
|
PAT&A % to Sales
|
20.95%
|
16.66%
|
From the above example it becomes evident
that both the companies are having similar sales and core operational cost
structures, with the EBDITA margins around 46%. However the Old &
Conservative limited has an old, highly depreciated plant and hence incurs
lower depreciation charge whereas the New & Extravagant Ltd., has a
brand-new plant and a high depreciation cost. Similarly the former has no
outstanding loans while the latter has borrowed funds to finance the venture. As
a result while the former demonstrates robust net profit margin of 29.92% while
the latter has only 23.80%. If the comparison had been made based on PAT
margins one could have erroneously denounced the latter for operational
inefficiencies, whereas in reality both have same core operational
efficiencies, but the latter has a couple of unfavorable cost structures that are
not directly linked to its core operational efficiency.
Conclusion:
In conclusion, EBDITA is an important
profit measure that helps investors and analysts draw conclusions in the right
perspective.
