How To Calculate EBITDA

As a business owner, you have to navigate through various financial KPIs or key measures to track your company’s profitability and growth. If you’re serious about being in business and making a profit, EBITDA should be high on your priority list of metrics to have a handle on. In a nutshell EBITDA is one of the critical metrics that indicate the business’s financial health. This metric offers business owners an accurate understanding of the company’s profitability and how the company’s operations are performing.

Once you know how to calculate EBITDA, you’ll feel in more control of your business, more confident about the future prosperity of the business, and you’ll also feel more financially savvy! So, let’s jump in!

 

 

What is EBITDA?

EBITDA is a financial method that measures the operating and financial performance of a company. Simply put, EBITDA measures the profit trends within a company. It helps to eliminate some external factors that could potentially skew a profitability forecast and allows business owners and investors to compare “apples-with-apples.”

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is commonly used by all major corporate companies as well as small to medium sized companies to measure profitability. It is calculated by subtracting operating expenses from gross profit before considering interest, taxes, depreciation and amortisation. This gives an indication of how much cash flow the company generates from its operations before costs associated with borrowing and taxes are taken into account.

Is EBITDA Margin the Same as Operating Margin? 

Yes. Operating margin or EBITDA margin measures a company’s profit after paying variable costs, but before paying interest or tax.

Why Is EBITDA Important?

EBITDA margin is a good measure of profitability because it takes into account other factors such as depreciation and amortisation which can affect the company’s bottom line. It is especially useful for comparing similar companies within the same industry to gauge their relative performance. Business owners often use the EBITDA to measure their performance against that of their competitors.

EBITDA can also be used to measure the POTENTIAL profitability of a business and for that reason it is often used by investors to evaluate companies even if they are not yet making net profits. EBITDA margin is a more accurate measure than accounting profits due to the fact it takes into account depreciation, amortisation and other operating expenses when calculating profitability.

EBITDA also gives investors an indication of the company’s potential cash flow and profitability. It is important to understand how to calculate EBITDA as it can give a more accurate reflection of the performance of a business than traditional accounting methods.

How To Calculate EBITDA?

When calculating EBITDA, you must examine your company’s financial books. First, determine your business’s income. This is likely to be predominantly from customer sales but can include grants or profit on sales of assets.

Once you have identified your net income, add up all the expenses you paid, such as salaries, property leases, equipment costs, and more. After adding your expenses, the result you get is known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

The E in EBITDA stands for earnings, which is the profit that your business earns before paying interest, taxes, depreciation, and amortisation. To calculate this metric, you must have your company’s revenue or sales figure for the specific period under consideration. It’s essential to ensure that you consider all types of revenue, including product sales, service sales, and any other income streams. Gross revenue is the total sales revenue from all sources before making any deductions.

Margin measures the percentage of revenue generated from a sale minus costs.  For example it means the revenue left after you subtract the costs associated with manufacturing a product. Margin reveals how profitable your business is after factoring in the total costs. To calculate the Margin, you need to do the following – Revenue – Cost of Goods Sold (COGS) / Revenue.

There are a couple of ways that you can calculate EDITDA.

Formula Number One:-

The first EBITDA formula is as follows:

Net income (including profits, revenue, and sales) + taxes + interest expenses + depreciation + amortisation = EBITDA

The second EBITDA formula is:

Operating income + depreciation and amortisation = EBITDA

To use EBITDA, it’s important to understand what each part of the formula means.

Earnings

Your earnings tend to be  your net profit as you report it to HMRC. Your net profit is the total revenue generated from sales, minus the total amount you deduct as a business costs.

Interest

Interest expenses are the cost of having debt. For EBITDA, the interest you are charged when you repay your debt is added back to your earnings.

Taxes

A company’s taxes can vary from one period to the next and are affected by a number of conditions that might not directly relate to your company’s operating results.

What is Amortisation in EBITDA?

Depreciation and amortisation represent the gradual decrease in value of assets over time. Depreciation applies to tangible assets such as machinery or vehicles, and EBITDA adds back this loss in value. Amortisation applies to intangible, or non-physical, assets such as patents or copyrights which eventually expire, and this is also added back.

What is the difference between EBITDA and EBITDA margin?

EBITDA is used to determine the total potential earnings of the company, whereas the operating margin aims to identify how much profit can the company generate through its operations.

To calculate EBITDA margin, the formula is: (EBITDA / Revenue) x 100. The higher the EBITDA margin, the greater the profitability of a business. It is important to note, however, that while EBITDA can give a quick estimate of the company’s worth, it does not take into account certain operating expenses and cash flows which could affect its overall value.

Now that you have calculated your EBITDA Margin, let’s interpret it. A high EBITDA Margin indicates that your company is profitable, efficient, and can effectively pay off its debts. On the other hand, a low EBITDA Margin implies that your company may be struggling with profitability, prices may be too low, or you may not be managing expenses properly.

What is a good EBITDA margin by industry?

A good EBITDA margin is relative because it depends on the company’s industry, but generally an EBITDA margin of 10% or more is considered good.

Knowing your EBITDA margin can help you make smart financial decisions and understand your business’s overall financial health. You can calculate your EBITDA margin using the formula we have explained in this guide. While the formula is relatively simple, it’s essential to ensure your financial books are accurate and up-to-date. A high EBITDA margin is desirable as it indicates that your business is profitable, and the lower the margin, the more you need to evaluate your company’s financial metrics to make necessary changes.

Clearview is a financial forecasting tool  helps business owners of all shapes and sizes better understand their financials such as cashflow and balance sheets. By taking away the need for spreadsheets you’re guaranteed to have a really clear picture of where your business is heading. There are lots of useful resources and videos too to help you get started.

Now you can talk confidently about your company’s EBITDA go ahead and impress and investor or business associate today!