EBITDA is a common term in the financial world and plays an important role in evaluating a company’s operating performance. However, many investors and finance enthusiasts have no idea what this term actually means or how it is calculated. So what is EBITDA? How is it calculated?
What is EBITDA?
EBITDA is part of the jargon in the financial world and can seem complicated at first glance. However, this abbreviation is actually a solid indication of how profitable a company is. So what exactly is EBITDA?
What is EBITDA? EBITDA, also known as EBITDA, reveals the operating profitability of a company. EBITDA, which is short for “earnings before interest, depreciation and taxes,” shows how much income a company generates from its core operations, and how much profit it makes before interest, depreciation, and tax expenses.
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The concept of EBITDA refers to the net income from the operations of the company and does not take into account any additional financial or one-time expenses. Thus, it allows us to see how profitable a company’s core business model is.
Yes, EBITDA is also called EBITDA, which is an abbreviation for “earnings before interest, taxes, depreciation, and amortization”.
Both the words mean the same thing; That is, it reflects the operating performance of a company by freeing it from additional financial liabilities.
EBITDA is an indispensable tool for investors and financial analysts. Thanks to EBITDA, we can find answers to questions such as how profitable a company’s operations are, what additional financial liabilities it has in addition to these activities, and how much these liabilities are reducing its profits.
This information provides a more enlightening insight into the future prospects of a company. That’s why it’s important for anyone who wants to gain a deeper understanding of the world of finance to know what EBITDA means and how it’s calculated.
What should be EBITDA?
We answered the question What is EBITDA? So, what should be the value of EBITDA?
Positive EBITDA means that the company is making a profit from its core operations. A negative value indicates a loss on an operating basis. However, in order to determine what is a “good” or “bad” EBITDA value, it is not correct to say that the exact EBITDA should be 100 or that the EBITDA should be 100,000.
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The sector the company operates in, its size, and the market it operates in are among the factors that determine what this value should be.
A high EBITDA indicates that the company’s business operations are profitable. However, the point to consider here is how this high price compares to the regional average or competing companies.
If the EBITDA value is significantly above the industry average, it may indicate that the company’s valuation may increase.
On the other hand, if the EBITDA value is very low and well below the industry average or competitors’ values, it may indicate that the company’s valuation does not reflect its true potential.
In short, it’s hard to give a definitive answer as to what EBITDA should be.
To understand the true meaning of this value, it is necessary to take into account regional averages, competitors’ values and the general financial condition of the company. This helps investors understand the true value and profitability potential of the company.
What does EBITDA mean?
EBITDA is a financial indicator used to evaluate the operating performance and profitability of a company. In short, EBITDA refers to the profit that a company earns without taking into account certain financial obligations and costs.
- operating profitabilityEBITDA: EBITDA reflects the profitability of a company from its core business operations. This helps us understand how profitable the core operations of the company are. In other words, EBITDA reflects the financial result of a company’s ability to manufacture its products or provide its services.
- financial liabilities free profitIn the EBITDA calculation, financial liabilities such as interest expense, taxes, depreciation and amortization are excluded. This gives analysts and investors a clear view of the company’s operating performance.
- regional comparisonEBITDA: EBITDA is a tool used within industries or when comparing different companies. EBITDA provides a more standardized measure, especially when comparing companies with high debt obligations or using different amortization strategies.
- investment decisionEBITDA: For investors and financial analysts, EBITDA is an important tool for assessing the investment potential of a company. This value is used as a guide, especially when estimating a company’s future cash flows.
In short, EBITDA is a profit indicator that shows how much profit a company makes from its core activities and is not affected by factors such as interest, taxes, depreciation. This is a very valuable metric for evaluating the operating profitability of companies and for comparisons within the industry.
How is EBITDA calculated?
Interest, taxes and depreciation expense are not taken into account in calculating EBITDA. Let us go through a detailed explanation of how EBITDA is calculated based on the factors mentioned in the calculation:
EBITDA = Gross Profit – Marketing, Selling and Distribution Expenses – General Administrative Expenses – Research and Development Expenses + Depreciation and Amortization Expenses.
Let us consider these components in detail below:
- Gross profit: It is the profit obtained by deducting the cost of goods sold (cost of goods sold) from the total revenue of sales of a company.
- Marketing, Selling and Distribution Expenses: These expenses include the expenses incurred to deliver the product or service to the consumers. It includes elements such as advertising, promotion, distribution and logistics.
- General and administrative expensesExpenses incurred for the general operation and management of the company. This may include salaries, rent, office expenses and other administrative expenses.
- R&D Expenditure: Expenditure incurred for research and development (R&D) activities. This includes investments in the development of new products or services, improvements in existing products, and research into technological innovations.
- depreciation and amortization expenseDepreciation: Depreciation represents the loss of value of intangible assets (such as patents, trademarks) while amortization represents the loss of value of physical assets (such as buildings, machinery).
The value obtained when you complete the calculation is the EBITDA value that reflects the operating profitability of the company. This value helps investors and analysts evaluate how much profit a company is generating from its core business activities.
How is EBITDA interpreted?
- comparative analysis: Experts compare a company’s EBITDA to the industry average and to other companies of the same size or similar industry. It is important for evaluating the company’s position in the industry and its performance relative to its competitors.
- time series analysisBy comparing a company’s EBITDA values over the past years to its current value, it may be worthwhile to try to understand the trend of a company’s operating profitability over time. It is used to identify improvements or declines in company performance.
- EBITDA Margin: We get the EBITDA margin by dividing the EBITDA value by the total revenue. This ratio shows how much of each sales unit remains with the company as operating profit. High EBITDA margin may indicate that the company is effectively managing its operations and keeping costs under control.
- executive efficiencyEBITDA: If the EBITDA value increases over time, it usually indicates that the company is managing its operating activities more effectively. However, this increase may be due to other factors, notably changes in depreciation and amortization expense.
- risk assessment: A low or declining EBITDA value may indicate that the company may be under financial stress. This can help the analyst assess the potential future risks of the company.
- leverage effect: If a company has a high debt ratio, it is important to carefully examine its EBITDA value. For a company with a high debt burden, a solid EBITDA value may indicate a high ability to make debt payments.
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