Start Management Concepts EBITDA: what is and how to calculate this financial indicator?

# EBITDA: what is and how to calculate this financial indicator?

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EBITDA is a widely used financial indicator in market value analyzes of companies. It means Earnings Before Interest, Taxes, Depreciation and Amortization, ie earnings before interest, taxes, depreciation and amortization (LAJIDA) after translated.

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## What is EBITDA?

O EBITDA is a very important financial indicator among analysts, entrepreneurs and investors. It is a view of the financial potential of a company disregarding the effects of fees, taxes and capital costs.

Imagine that you are comparing the financial potential of one company with another. Let's say that the second company shows double the net profit compared to the first.

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You decide to do a deeper analysis of the Balance Sheet and Statement of Income for the Year (DRE). From it, you discover that the operation of the first company is more profitable. But with loans made in the past and an inflated fixed capital structure, you realize that profit is hampered by interest and depreciation.

O LAJIDA tries precisely to exclude this kind of distortion by analyzing the financial potential of the operation itself. Which is what analysts and investors consider when doing the valuation of a company.

## How to calculate EBITDA?

There are some ways to calculate EBITDA. At the end of the day you find the same result. Some examples are below:

1 Formula: Operating Profit + Depreciation + Amortization

Operating income consists of Net Revenue - Cost of goods sold (CMV) - Operating Expenses. The 1 Formula in a more complete view would be:

Formula 1: Net Revenue - CMV - Operating Expenses + Depreciation + Amortization

Another way of calculating EBITDA is based on the result of the DRE, that is, net income. In this case, we would have:

Formula 2: Net Income + Interest + Taxes + Depreciation + Amortization

This would be a more literal version of the calculation, since the translated name of the indicator is earnings before interest, taxes, depreciation and amortization (EBITDA).

Let's look at an example of EBITDA.

One company has revenues of 100 million, direct costs of 40 million, operating expenses of 30 million and records in its DRE 10 millions of expenses with depreciation and amortization. This would generate an operating profit of 20 million. However, the company paid 10 million tax and 5 million interest.

This company has net profit of 5 million. but your EBITDA, calculated by F2 is:

5 (net income) + 10 (D & A) + 10 (taxes) + 5 (interest) = 30 million

…through the F1:

20 (operating profit) + 10 (D & A) = 30 million

## Applications of EBITDA

O EBITDA is widely used in business analysis, to calculate the free cash flow and project it, for example.

O valuation, which is the calculation of the market value of a company, is an example of using the financial indicator. O economic feasibility study, which measures the viability of a project or a business idea also uses it.

To do so, we have two ready-made sheets which may help:

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Filippo is passionate about entrepreneurship, has worked as a consultant and has gradually been specializing in digital business and online marketing. He is a partner, marketing director of LUZ and writes whenever he can about everything here in the Blog.