The full form of EBITA is Earnings Before Interest, Taxes and Amortization. It is a financial parameter, which is used by the investors to measure the profitability of a company. Two companies in the same industry can be compared using this parameter.
Index
How EBITA is Calculated?
EBITA= Revenue-Operating Expanses
Where:
Revenue is the total revenue earned by the company
Operating expenses= All expenses required for running the business. It excludes Interest, Taxes and Amortization.
Difference Between EBITA and EBITDA
The full form of EBITDA is earnings before interest, taxes, depreciation, and amortization The main difference between EBITA and EBITDA is that EBITDA includes depreciation also. Both terms are used to measure the profitability of a firm. Some industries require significant investment in fixed assets, so ignoring the depreciation may not depict true situation of companies’ profitability in such cases. EBITDA is deemed a more appropriate measure of operating profitability in these type of companies.
How Can You Find a Companies’ EBITA?
If a company doesn’t provide EBITA, you can determine if from the financial statements of the company. Find the earnings, tax, and interest figures on the income statement; the amortization is usually found in the notes to operating profit or on the cash flow statement. A shortcut to calculating EBITA is to start with operating profit, also called earnings before interest and taxes (EBIT), then add back amortization.
Significance of EBITA
EBITA is seen as a reliable indicator to know, how efficient the companies’ operations are. The profitability of a company may also be assessed by using this indicator, although doing so can be misleading because of the excluded expenses.
Conclusion
EBITA, Earnings Before Interest, Taxes and Amortization is a useful indicator to find the companies’ profitability, efficiency and value. However sometimes, it may not give you the clear picture.
Most analysts use earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a more accurate financial picture—but it also has the same limitations in that it hides true profitability by excluding these expenses.
Also read: Return on Equity (ROE), Its Significance and Limitations
