What is EBITA

The economic term EBITA is an acronym that stands for “earnings before interest, taxes and amortization”. To calculate a company's EBITA, an analyst should first determine the company’s earnings before tax (EBT)--which may be found on income statements and other investor relations materials, and then add the interest and amortization, which refers to the process of gradually writing off the initial cost of an asset.

The EBITA formula, simply shown, is as follows: EBITA = earnings before tax (EBT) + interest expense + amortization expense  

EBITA is a variation of the more commonly used EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization”. Therefore, “EBITA” differs from “EBITDA”, in that the latter calculation deducts depreciation expenses. However both metrics are used to gauge a company's operating profitability, which refers to earnings generated throughout the normal course of doing business--without regards capital expenditures and financing costs. Both measures are frequently considered to be reliable indicators of a company’s cash flow. However, because certain industries require significant investment in fixed assets, EBITDA can potentially distort a company's profitability by ignoring depreciation, therefore EBITA is deemed to be a more appropriate measure of operating profitability. In other words, the EBITA metric may replace the EBITDA metric, for companies that have substantial capital expenditures that may skew the ratio.

Still confused? Consider this example. Deena’s Donuts has been a favorite in her local town, for years and years--regularly obliterating the competition. Case in point: in 2016, the shop raked in $600,000, earning a net profit of $390,000 for that year. But the store's wise old proprietor Deena suspects she can generate substantially more revenue by renovating the the shop, to make its look more contemporary and cheerful. She subsequently takes out a loan, and rehabs the space. Lo and behold: in 2017, Deena’s sales spiked to a whopping million dollars. However her net profit actually decreased to $382,000. Deena’s smaller profit can be explained by the EBITA calculation, which shows that her earnings before interest, taxes, and amortization, had dramatically increased from 2016 to 2017--even though her net income decreased, due to her renovation costs.

This example demonstrates the grave importance of studying multiple metrics when evaluating the performance of a business. Case in point: if you solely observed Deena’s net income, you would cultivate the false impression that her shop performed poorer in 2017, than in 2016, which would be an errant assumption, because she actually witnessed an uptick in sales.