What is EBITA? - Slide

The following slide explains EBITA in a nutshell and has the following elements:

1. Formula
2. Example
3. Graphic

EBITA Described

What is EBITA?

Meaning and Definition:

EBITA is profits measured at the second level from the top, after EBDITA. It is the profit after all

expenses and costs, including depreciation but before: 

• Interest,
• Corporate income tax and
•  Appropriations towards dividends, reserves, etc.·     

We can also define it as EBDITA less Depreciation.

Formula:

EBITA	=	Sales Revenues	−	All Expenses Including Depreciation but Excluding Interest, Tax and Appropriations
OR
EBITA	=	EBDITA	−	Depreciation

Significance:

EBITA measures profitability without considering the impact of finance cost, thereby draw proper comparison between companies of the peer group and draw correct conclusions about the operational efficiencies. Say, 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 EBITA helps through proper light.

Example:

	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
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 Interest 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 no outstanding loans while the latter has borrowed funds to finance the venture. As a result while the former’s EBITA is 44.67%, the latter’s is just 40.13%. 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 the burden of debt that is not directly linked to its core operational efficiency.

Conclusion:

In conclusion, EBITA is an important profit measure, after EBDITA that helps investors and analysts make proper comparison and draw right conclusion about similar companies.