In fact, almost all new tech companies stress on EBITDA. Several non-tech companies too.
And then you have people like Charlie Munger and Warren Buffett who say, “I think that every time you see the word EBITDA, you should substitute the word bullsh*t earnings”.
Why do so many companies use it? And why does Warren Buffett not like it?
what is EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial measure used to evaluate the profitability and financial health of a business.
EBITDA meaning
EBITDA is calculated by taking a company's earnings before subtracting interest, taxes, depreciation, and amortization expenses. It is often used by investors, analysts, and lenders to compare the financial performance of companies across different industries, as it provides a clearer picture of a company's operating performance by excluding non-operating expenses.
how to calculate ebitda
To calculate EBITDA, you need to follow the formula:
EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization
Here's a breakdown of each component:
Earnings: This refers to the company's net income or profit before taking into account interest, taxes, depreciation, and amortization.
Interest: This is the interest expense paid on the company's outstanding debt.
Taxes: This is the amount of taxes the company is required to pay on its income.
Depreciation: This is the amount of depreciation expense that the company has incurred on its assets. Depreciation is a non-cash expense that reflects the wear and tear of assets over time.
Amortization: This is the amount of amortization expense that the company has incurred on its intangible assets, such as patents, trademarks, and goodwill.
To calculate EBITDA, you would add up all of these components, which are typically reported on a company's income statement. For example, if a company reported earnings of $1,000, interest expense of $200, taxes of $300, depreciation of $100, and amortization of $50, its EBITDA would be:
EBITDA = $1,000 + $200 + $300 + $100 + $50 = $1,650
Therefore, the company's EBITDA would be $1,650.
ebitda margin
EBITDA margin is a financial metric that expresses EBITDA as a percentage of total revenue generated by a company. It is a measure of a company's operating profitability, as it indicates how much of each dollar of revenue is left after deducting operating expenses other than interest, taxes, depreciation, and amortization.
The formula for calculating EBITDA margin is as follows:
EBITDA Margin = (EBITDA / Total Revenue) x 100
For example, if a company generated $10 million in revenue and had an EBITDA of $2 million, its EBITDA margin would be:
EBITDA Margin = ($2 million / $10 million) x 100 = 20%
This means that for every dollar of revenue generated, the company had 20 cents left over after deducting operating expenses other than interest, taxes, depreciation, and amortization.
EBITDA margin is useful for comparing the operating profitability of companies within the same industry or sector. It is also commonly used in financial analysis and investment research to evaluate a company's financial health and growth potential. However, it is important to keep in mind that EBITDA margin does not take into account other important factors such as capital expenditures, working capital requirements, and changes in cash flow.
adjusted ebitda
Adjusted EBITDA is a financial metric that represents EBITDA adjusted for certain non-recurring or non-operating items. It is often used by companies to present a clearer picture of their operating performance by excluding one-time expenses or non-core business activities.
Adjusted EBITDA is calculated by starting with EBITDA and then making adjustments for specific items that are considered non-recurring or non-operating. Examples of adjustments that might be made to EBITDA to arrive at Adjusted EBITDA include:
Restructuring charges or costs associated with a merger or acquisition
One-time expenses such as legal settlements, severance payments, or write-downs of assets
Non-operating income or expenses such as gains or losses from the sale of investments or assets
By adjusting EBITDA for these types of items, a company can provide a more accurate picture of its ongoing operating performance. This can be particularly useful for investors or lenders who want to evaluate a company's ability to generate cash flow from its core business activities.
