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.