What Is EBITA?
Earnings before interest, taxes, and amortization (EBITA) is a measure of company profitability used by investors. It is helpful for the 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 this list of factors. That is earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Earnings before interest, taxes, and amortization (EBITA) removes 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 intangible asset over a period of years, from the earnings equation.
- This measure can provide a more accurate view of a company’s real performance over time.
- EBITA may also allow for easier comparison of one company to another in the same industry.
A company’s EBITA is considered by some analysts and investors to be a more accurate representation of its real earnings. It removes 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 intangible asset over a period of years, from the equation.
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 to the calculation. Depreciation, in company accounting, is the recording of the reduced value of the company’s tangible assets over time. It’s a way of accounting for the wear and tear on assets such as equipment and facilities. Some companies, such as those in the utilities, manufacturing, and telecommunications industries, require significant expenditures on equipment and infrastructure, which are reflected in their books.
Both EBITA and EBITDA are useful tools for 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. In that case, EBITDA is deemed to be a more appropriate measure of operating profitability.
In other words, the EBITA measurement may be used instead of EBITDA for companies that do not have substantial capital expenditures that may skew the numbers.
EBITA and GAAP Earnings vs. Non-GAAP Earnings
Generally accepted accounting principles (GAAP) earnings are, as their name suggests, a common set of standards that are accepted and used by companies and their accounting departments. The use of GAAP earnings standardizes the financial reporting of publicly traded companies.
Many companies report GAAP earnings as well as non-GAAP earnings, which exclude one-time transactions. The rationale for reporting non-GAAP earnings is that substantial one-off costs, such as organizational restructuring, can distort the true picture of a company’s financial performance and should therefore not be thought of as normal operational costs. Earnings before interest and taxes (EBIT), EBITA, and EBITDA are examples of commonly used non-GAAP financial measures.
Investors need to be careful to take GAAP earnings into consideration when making investment decisions. Standardized accounting rules allow for the comparison of financial results between competitive companies. The U.S. Securities and Exchange Commission (SEC) has been putting pressure on companies to be more transparent about their GAAP vs. non-GAAP earnings. One SEC concern is that economic conditions related to the coronavirus pandemic have forced companies to account for unusual gains, charges, and losses that have complicated their financial reporting.
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
What Is the Difference Between EBITA and EBITDA?
Each of these is a measure of profitability used by investors: earnings before interest, taxes, and amortization (EBITA) and earnings before interest, taxes, depreciation, and amortization (EBITDA). Both are useful in gauging a company’s profitability. EBITDA is the more commonly used measure and adds depreciation—the accounting practice of recording the reduced value of a company’s tangible assets over time—to the list of factors.
Where Can You Find a Company’s EBITA?
If a company doesn’t provide this metric (there’s no legal requirement to do so), you find it by looking at the firm’s financial statements. Look for the earnings, tax, and interest figures on the income statement; the amortization is normally found in the notes to operating profit or on the cash flow statement. A shortcut to calculating EBITA is to start with operating profit, also called earnings before interest and taxes (EBIT), then add back amortization.
How Is EBITA Useful?
EBITA is thought to be a reliable indicator of how much cash flow a company has on hand to put back into the business or to pay dividends. It also can indicate how efficient a company’s operations are.