EBITA, short for Earnings before Interest Taxes and Amortization, is a formula that calculates the operational profitability of a company by including the costs of the equipment – and excluding the financing costs.
As one of many equations, accountants use this to ascertain the profitability and earnings of a company – and it’s almost on the same line as EBITDA and EBIT. Many people confuse between them – but they are actually as different as they can be.
Depending on the company, an accountant can use one (or all) of these ratios to better understand its earning and see where they can bring improvement.
When options such as net income and gross revenue are not readily available, the EBITA is a good way to calculate its core profitability. Corporate taxes and expenses may vary at times – and this will allow you to get a good idea of the actual profits, without being concerned with factors such as financial costs.
This calculation method is particularly useful when large investments in fixed and depreciable assets are required – but you still need to ascertain the value of a company. As a result, EBITA is generally used to calculate the earnings by including the aging asset costs – but excluding the costs that have been associated with them.
Calculating the EBITA
Compared to other formulas designed to ascertain the profitability of a company, EBITA is fairly easy to understand. To get your result, you have to subtract the COGS (cost of goods sold) and operating expenses (minus the amortization) from the total revenue of the company. In the end, the formula ought to look something like this: EBITA = Gross Revenue – Cost of Goods Sold – (Operating Expenses + Amortization).
This method is also known as the direct one since it takes the result straight from the gross revenue. However, you can also get to the result in an indirect way – by adding back the expenses, taxes, interest, and amortization into the net income. As a result, the new formula would be this:
Either way, the calculation method is fairly simple. Every figure appears in your company’s income statement – and you can choose either formula you like. The results would be the same.
Sometimes, however, the indirect method would be a much better fit compared to the direct one. For example, if you have a non-detailed income statement, it might be fairly difficult for you to break out the operating expenses and cost of goods sold. In this case, you can use the second formula – since that data is always on your income statement.
The Bottom Line
EBITA is crucial when it comes to analyzing the profitability of a company – and as a rule, the higher the number, the better. Still, if you have a fairly high net income, chances are that you will also have a high EBITA number.
To put it plainly, net income shows overall profitability while EBITA reveals the operation profitability.