In world and Russian practice of assessing the activities of the enterprise, many different indicators are used. One of them is EBITDA. This is an abbreviation that is used by global companies to denote a certain type of profit. What is EBITDA, you need to consider in more detail. This will allow an adequate assessment of the performance of the company. By correlating the results of the analysis performed according to the generally recognized methodology, it is possible to compare them with other similar enterprises not only in our country, but also abroad.
General concept
To answer the question of what EBITDA is, you must first say that this is an absolute value. This is the abbreviated name of the first letters of an indicator such as Earnings before Interest, Taxes, Depreciationand Amortization. This concept is translated from English as "profit before tax, interest on loans, excluding depreciation."
This is one of types of profit any enterprise. It is between gross and book income. This value is not included in the standards of domestic accounting. Its application would introduce certain contradictions and distortions into the existing regulatory framework.
Initially, the calculation of EBITDA was necessary in determining the appropriateness of acquisitions and mergers. This absolute indicator, together with net profit, can participate in comparing the activities of several companies in the same industry.
The meaning of the indicator
The previously presented indicator was necessary to assess the company's ability to service its debt. Based on it, conclusions were drawn about how much a company could pay in the planning period.
EBITDA was previously more interested in those investors who considered the company not as a long-term investment opportunity, but as a combination of assets. From their point of view, this property would be beneficial to sell separately in the future. In this case, it is the indicator under consideration that characterized the amount that would have to be directed to paying loans.
In the 80s of the last century, the scheme according to which the company was bought from borrowed sources of financing was quite common. Today, an indicator of such profit is used by most world companies to assess the possibility of investment and self-financing.
Indicator calculation
To understand the essence of the considered system for assessing the financial condition of a company, it is necessary to delve into the principle of determining an indicator. The calculation of EBITDA involves initially finding the amount of net profit for the reporting period (EBIT). It is like this:
EBIT = Net Profit / Loss - Interest Income / Expense - Taxation of Profit.
Based on the data of form No. 2 of the financial statements, this formula can be represented as follows:
EBIT = s 2400 - s. 2300 - (p. 2410 + p. 2421 + p. 2450).
Further, from the net profit / loss indicator, it is necessary to remove the indicator of interest expenses / income, as well as profit taxation. The formula will be as follows:
EBITDA = EBIT - Depreciation.
Depreciation deductions of intangible assets and fixed assets can be taken for calculation from the Appendix to the balance sheet. This value is in column 3.
Method essence
EBITDA, the calculation formula of which was presented above, involves the calculation of interim profit before tax and interest EBIT. This approach allows you to understand all the stages of calculating the absolute results of the company by category.
EBITDA is already “cleared” of depreciation, interest and taxes as the company's profit.It provides an opportunity to assess the real volume of net income of the organization. It is not affected by investments (an adjustment is made for depreciation), debt obligations (adjusted for interest), and tax legislation (income tax).
To the question: “EBITDA - what is this concept in simple language?”, The answer will be: profit from a certain point of view. This approach allows you to compare enterprises of the same industry in terms of their operating results. They do not include the debt burden, the amount of investment and the current tax regime.
Even if companies take a different approach to organizing accounting policies for depreciation, revaluation of assets, with different tax rates and the amount of debt, they can be compared. This is quite convenient for getting the opportunity to conclude about the real situation in the enterprise.
The nuances of using the indicator
There are several nuances in applying EBITDA. What is plain language means this indicator has been defined above. Based on this, it should be noted that using this approach does not disclose information about the needs of the enterprise in investments.
If the organization is characterized by a high depreciation load, the need for reinvestment, the information user receives an incomplete picture. For example, in the extractive industry, adjustments for depreciation significantly increase profits.
Therefore, the considered indicator must be considered in conjunction with other approaches and methods (for example, EBIT). Values such as pure Operating profit, as well as gross margin.
IFRS reporting
To understand what EBITDA is, you need to refer to the financial statements. Most often, enterprises present such indicators in additions, releases to the report, and various presentations. But quite often it happens that such an approach to the disclosure of net profit can be found directly in financial forms. These include a report on total income and notes.
It is not prohibited to use this approach when generating such documentation. IFRS does not have specific disclosure requirements. But given the importance of this technique, it is still recommended that such information be disclosed to users.
Having familiarized yourself with the concept of what EBITDA is, we can conclude that this is an indicator of net profit, considered from a certain angle. It is important for planning and conducting investment companies, allowing you to compare the production of one industry.
