EBITDA
EBITDA is a company’s earnings before interest, tax, depreciation and amortisation, a measure of profit from the core business before financing and accounting charges.
EBITDA = Revenue − Operating expenses (before interest, depreciation and tax)
What it is
Start with sales and subtract the costs of running the business: raw materials, salaries, rent, power and so on. What is left is EBITDA. In Indian results it is often shown as operating profit.
It leaves out four things: interest (how the company is funded), tax, depreciation (the wearing out of machines and buildings) and amortisation (the same idea for intangible assets).
How to read it
EBITDA margin = EBITDA ÷ revenue. It tells you how many paise of each rupee of sales are left after running costs. A steady or rising margin suggests the company has pricing power or keeps costs in check. A falling margin means costs are growing faster than sales.
Because it ignores interest and tax, EBITDA is handy for comparing the operating performance of companies with different debt levels or tax situations.
What it leaves out
Interest and depreciation are real costs. A company with heavy debt can show healthy EBITDA and still make a loss after interest. A factory-heavy business must keep spending on machines, which depreciation reflects.
EBITDA is also not cash. Money stuck in unpaid bills or unsold stock does not show up here. Read it with net profit and cash from operations.
From sales to EBITDA
A company has sales of ₹1,000 crore. Raw materials cost ₹550 crore, employees ₹150 crore and other expenses ₹100 crore. EBITDA = ₹1,000 − ₹800 = ₹200 crore, an EBITDA margin of 20%. After depreciation of ₹40 crore, interest of ₹30 crore and tax, net profit may be closer to ₹100 crore.
Common mistakes
- Treating EBITDA as the money the company actually makes for shareholders.
- Ignoring interest for heavily indebted companies.
- Looking at EBITDA growth without checking the margin.
Sales are ₹500 crore and EBITDA is ₹75 crore. What is the EBITDA margin?
- 15%
- 75%
- 6.7%
Show the answer
15%. EBITDA margin = EBITDA ÷ sales = ₹75 crore ÷ ₹500 crore = 15%.
Common questions
Is EBITDA the same as operating profit?
In most Indian result tables, yes: operating profit is shown before interest and depreciation, which is EBITDA. Some reports define operating profit after depreciation, so check the table.
What is a good EBITDA margin?
It varies widely by sector. Compare a company with its own history and with similar businesses rather than with a fixed number.
Why do companies highlight EBITDA?
It shows the core business before debt and accounting charges. That is useful, but it also makes results look better than net profit, so always check both.
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