What is EBITA?
The acronym EBITA shows a company's earnings before any interest expenses, taxes, and amortization are taken into account. By setting aside the impact of financing decisions, tax obligations, and non-cash expenses, EBITA allows finance professionals to evaluate a company's performance solely based on its core operations.
By focusing on operational profitability, EBITA helps identify areas of strength and weakness, guiding the development and adjustment of financial strategies to drive sustainable growth.
The calculation of EBITA involves compiling the company's earnings before any deductions for interest, taxes, and amortization expenses. It highlights the financial performance that can be directly attributed to the core operations of the business. This way, finance professionals can accurately assess the operational efficiency of different business segments, or evaluate the overall performance of the company.
How is EBITA useful?
EBITA gives a very quick appraisal of your company’s financial efficiency. By removing other concerns like debt and equity, it shows potential investors your ability to generate cash.
In the most practical terms, banks and other lenders will look at your EBITA value and/or EBITDA margin to determine whether you can repay debts.
It also shows your potential ability to thrive (or survive) after restructuring. (It first became popular during a wave of leveraged buyouts in the 1980s.)
Venture capital firms often use EBITA to compare companies in the same or similar industry. The one with the higher “EBITA coverage” is more likely to become profitable or have the higher valuation.
EBITA becomes particularly valuable when assessing the effectiveness of a company's finance strategy, and comparing similar companies with one another. It shows holistically how your company generates profits from its primary business activities, to evaluate the success of strategic initiatives.
This measure also tells you quickly whether more investigation is required - like a doctor using BMI with a patient. If the BMI is within a healthy range, you likely don’t need to do more testing. If the BMI (or EBITA in this case) is vastly different from similar patients (or companies), you need to dig deeper to ensure there are no serious issues.
EBITA vs EBITDA
While EBITA and EBITDA are most commonly discussed, corporate finance teams have a range of calculations to consider. Similar to assessing gross profit vs net profit, removing letters from the acronym focuses your financial statements more on total revenue rather than the company’s net income.
EBT = earnings before tax. This is the most obvious measure of incoming cash flow, but not a full picture of profitability.
EBIT = earnings before interest and tax, also known as operating profit. By including interest, you get a broad idea of the company’s asset value and how it changes due to market forces.
EBITA = earnings before interest, taxes, and amortization. This includes loan repayments and changes to the company’s debts over time.
EBITDA = earnings before interest, tax, depreciation, and amortization. The full acronym adds depreciation, which factors in the way assets lose value over time (and therefore the company’s overall worth changes).
EBITA and EBITDA are both valuable metrics that provide insights into a company's operational profitability. While EBITA focuses solely on core earnings, excluding depreciation, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization expenses) provides a broader measure by including depreciation. Finance teams use these metrics to evaluate operational efficiency, assess cash flow generation, and inform finance strategies.
EBITDA is typically the most common measure used by investors because it gives the most accurate picture. But it’s particularly essential for asset- or inventory-heavy businesses, where depreciation can have a sizeable impact on your income statement.
In terms of applications, EBITA and EBITDA have their respective strengths. EBITA is particularly useful when assessing the operational efficiency and profitability of companies in capital-intensive industries. It allows finance professionals to evaluate performance without the distortion caused by non-operating factors such as interest, taxes, and amortization.
EBITDA, with its inclusion of depreciation, is a popular metric for evaluating a company's cash flow-generating ability. It is often used in investment analysis, especially when assessing companies with significant capital expenditures. EBITDA helps investors gauge the company's ability to repay debt, fund future growth, or make acquisitions.
EBIT, EBITA, and EBITDA are all non-GAAP (Generally Accepted Accounting Principles)metrics and don’t need to be labeled on financial statements. So you won’t see a neatly labeled field in most balance sheets or cash flow statements.
But you’ll use figures from your primary financial reports to calculate the company’s EBITA.
Related terms and metrics
Here are a few related terms that tend to come up when discussing EBITA and value of a company.
Cost of goods sold (COGS) are your expenses needed only to produce the goods or services you sell. This excludes operating expenses such as corporate rent, your finance and HR teams, salespeople, and marketing costs.
Operating expenses are typically all of the other costs not included in your COGS above.
Operating income, similar to EBITA, is used to measure the potential profitability of a company. It takes incoming cash and removes wages, depreciation, and cost of goods sold, but excludes tax and unusual one-off items.
Depreciation is the loss in value of your tangible assets over time. If your company has 100 laptops for 100 staff members, each of these has resale value should you need to raise cash. But each year, the resale value is lower, which means in real terms your assets are worth less.
Amortization is the reduction in your debts as you repay them over time. It’s a specific accounting technique that gives a more accurate view of your liabilities as they (hopefully) reduce.