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- Calculating EBITDA - how do you do it?
Calculating EBITDA - how do you do it?
What is EBITDA?
Besides EBIT, the term EBITDA is often used when analysing business results. This stands for "Earnings Before Interest, Taxes, Depreciation, and Amortisation". It adds depreciation and amortisation to the EBIT calculation, giving a broader picture of operating profitability.
How can you calculate EBITDA?
Formula:
EBITDA = EBIT + Depreciation + Amortisation
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Formula according to the Commission on Accounting Standards (CBN):
Add depreciation and amortisation:
This includes both tangible and intangible fixed assets, as well as any extraordinary depreciation.
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- Depreciation and amortisation of formation expenses, intangible assets and property, plant and equipment (item 630)
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- Write-downs on inventories (item 631/4)
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- Exceptional depreciation and amortisation (item 660)
Correct for reversal of depreciation and amortisation: These are previously taken write-offs that are reversed.
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- Write-back of depreciation and impairment losses (item 760)
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- Sample calculation:
- Company turnover: €500,000
- Operating expenses: €300,000
- Depreciation and amortisation: €50,000
Then this is to say:
EBITDA = €200,000 (EBIT) + €50,000 (depreciation and amortisation) = €250,000
The company thus has an EBITDA of €250,000.
Important to know too: For smaller companies using a simplified accounting scheme, it can be challenging to EBIT to be calculated precisely due to lack of detailed posts.
What is a healthy EBITDA?
A healthy EBITDA margin varies widely by industry, but in general, a margin of 15% or higher is often seen as very positive.
The key in assessing a 'healthy' EBITDA is to observe the capital structure and fixed asset investments that characterise your business. For companies that rely heavily on physical assets, a higher EBITDA may be necessary to offset greater depreciation and amortisation.
Again, it is important to analyse EBITDA regularly. A rising trend in EBITDA may indicate an improvement in your business operations and the overall financial health of your company.
Why is EBITDA important?
Besides analysing the financial health of your company, EBITDA is also often used as a benchmark in business acquisitions. As an experienced business coach I help companies improve their EBITDA and optimise business processes. Feel free to contact me for an initial discussion to discover how I can support you in increasing your profitability and successfully executing acquisitions.
Kurt Vervloet
Kurt Vervloet is a business coach, blogger and speaker. Since 2017, he has been coaching businesses around the world, ranging from solo entrepreneurs, SME companies to executive management teams at large organisations. His clients choose to work with him because of my proven, no-nonsense approach to optimising and scaling businesses. By achieving great results with his clients, he has already been rewarded with several Awards.
