What Is EBITA?
Earnings before interest, taxes, and amortization (EBITA) is a measure of company profitability used by investors. It is helpful for comparison of one company to another in the same line of business. In some cases, it also can provide a more accurate view of the company's real performance over time.
Another similar measure adds depreciation to the list of factors to be eliminated from the earnings total. That is earnings before interest, taxes, depreciation, and amortization (EBITDA).
A company's EBITA is considered by some analysts and investors to be a more accurate representation of its real earnings. It removes from the equation the taxes owed, the interest on company debt, and the effects of amortization, which is the accounting practice of writing off the cost of an asset over a period of years.
One benefit is that it more clearly indicates how much cash flow a company has on hand to reinvest in the business or pay dividends. It also is seen as an indicator of the efficiency of a company's operations.
EBITA vs. EBITDA
EBITA is not used as commonly as EBITDA, which adds depreciation into the calculation. Depreciation, in company accounting, is the recording of the reduced value of the company's assets over time. It's the wear and tear on the equipment and facilities. Some companies such as those in the utilities, manufacturing, and telecommunications industries, require significant expenditures in equipment and infrastructure, which are reflected in their books.
- EBITA can provide a more accurate view of a company's real performance over time.
- EBITA removes several factors that may distort the picture of a company's performance over time.
- The measure also allows easier comparison of one company to another in the same industry.
Both EBITA and EBITDA are useful tools in gauging a company's operating profitability. Profitability is earnings generated throughout the ordinary course of doing business. A clearer picture of the company's profitability may be gained if capital expenditures and financing costs are subtracted from the official earnings total.
Analysts generally consider both EBITA and EBITDA to be reliable indicators of a company’s cash flow. However, some industries require significant investment in fixed assets. Using EBITA to evaluate companies in those industries may distort a company's profitability by ignoring the depreciation of those assets. EBITA is deemed to be a more appropriate measure of its operating profitability.
In other words, the EBITA measurement may be used instead of EBITDA for companies that have substantial capital expenditures which may skew the numbers.
Calculation of EBITA
To calculate a company's EBITA, an analyst must first determine the company’s earnings before tax (EBT). This figure appears in the company's income statements and other investor relations materials. Add to this figure any interest and amortization costs. So, the formula is: EBITA = EBT + interest expense + amortization expense.
An Example of EBITA
In 2016, XYZ company took in $600,000 and earned a net profit of $390,000 for the year. The business subsequently took out a loan to renovate its sales floor. The following year, sales rose to $1 million but net profit decreased to $382,000, down from the previous year.
However, using the EBITA calculation, the firm's earnings before interest, taxes, and amortization increased between the recorded years, even though net profit decreased due to the cost of renovations.
At first glance, it seemed the business performed worse in the second reported year because the cost of renovations was not taken into account. This example demonstrates the importance of studying multiple metrics when evaluating the performance of a business.