EBITDA
The EBITDA is an economic indicator that describes the sustainable operating cash flow before tax of a company.
definition
EBITDA is the abbreviation ( acronym ) for English: E arnings B efore I nterest, T axes, D epreciation and A mortization. Translated, EBITDA describes “earnings before interest, taxes, depreciation on property, plant and equipment and depreciation on intangible assets”.
The EBITDA is obtained by adding the depreciation of property, plant and equipment and intangible assets ( goodwill , patents, etc.) to the (adjusted) EBIT result .
| EBIT (adjusted) | |
| + | Depreciation on property, plant and equipment |
| = | EBITD |
| + | Depreciation of intangible assets |
| = | EBITDA |
The calculation scheme for the EBITDA result follows the indirect calculation of a cash flow : By adding the non-cash depreciation to an operating result, an operating cash flow is obtained. The operating cash flow is determined for EBITDA on the basis of a simplifying formula - not all non-cash transactions are recorded. In the calculation scheme, only the regularly occurring and fairly stable depreciation are taken into account. As a result, EBITDA is not distorted by changes in other items that tend to fluctuate randomly (e.g. changes in provisions , changes in net working capital ). As a result, the EBITDA result is significantly more stable than z. B. the cash flow from operating activities. The EBITDA can therefore be interpreted as (easy to calculate ) sustainable operating cash flow before taxes . The predicate “sustainable” is particularly justified if the determination of the EBITDA is based on an EBIT result that has been adjusted for extraordinary and aperiodic effects.
The English term amortization (write- offs on intangible assets ) is not to be equated with the German term “amortization”, which in business administration only refers to goodwill amortization, but not to amortization, e.g. B. of licenses, patents and software.
Applications
Among other things, EBITDA is used as a key performance indicator in operational controlling , in company valuation , in assessing the creditworthiness of companies, in measuring profit-related management salaries and in financial communication .
The EBITDA result is particularly suitable for cross-border comparisons of operational performance, as all significant distortions on an international level (depreciation policy, goodwill treatment, financing policy, tax system) have been eliminated in EBITDA. Due to the elimination of numerous (fluctuating) variables, the EBITDA shows a higher stability than other results. It therefore also offers a good starting point for estimating future profitability.
The description of the EBITDA result as an operating “profit” is misleading, however. This interpretation suggests a profitability that is not given on closer inspection. A profit (such as EBIT) is a balance of income and expenses. A positive balance (profit) shows that the company in question was able to increase the assets of the investor in the relevant period, a negative balance (loss) indicates the destruction of assets. A positive EBITDA result, on the other hand, does not indicate an increase in assets. The necessary investments (replacement investments) have to be financed from the operative cash flow before taxes (EBITDA) in order to maintain the business. In addition, tax payments by the company also reduce the cash flows that are actually available. In order to assess an increase in assets in operational business, it is better to look at operational profit figures ( EBIT , NOPAT ) or operational free cash flows .
EBITDA metrics
Absolute key figures such as EBITDA can be analyzed over time. Developments (trends) and changes can be read off. In the analysis, it is particularly interesting to see how much the EBITDA fluctuates or how stable it proves to be in times of crisis. However, absolute successes do not enable company or branch comparisons. For this purpose, ratios must be formed. EBITDA is the numerator or denominator of the following key figures:
Ratio to sales
The EBITDA (sales) margin (English: EBITDA margin ) is the ratio of EBITDA to sales (EBITDA divided by sales).
Relation to the excused company value
The entschuldete enterprise value , English enterprise value is used especially in acquisitions to it (or possibly expected average over several years) with the EBITDA to put into consideration. This gives you, for example, an indication of the number of years after which the capital raised by the new owner could flow back.
Further
Instead of the enterprise value, the more easily determinable market value (market capitalization) is occasionally used, which does not make much difference for companies without extraordinary debts. Especially foreign investors interested in next to the relationship with the volume of credit (for example, long-term debt, net debt) and debt service (principal and interest).
An alternative EBITDA margin is obtained if you put the earnings figure in relation to the balance sheet total , English EBITDA return on total assets . It is also suitable for non-listed companies for which there is no company value determined via the market. With this key figure you can see how much return the equity and debt capital employed (or the total assets) generate in percent.
Appreciation
Company comparisons of companies with different capital intensity based on EBITDA or EBITDA key figures make little sense. Companies with different capital intensities have different needs for replacement investments and the corresponding EBITDA results can be classified differently. Also, lower debt or lower tax payments require lower EBITDA results to maintain business. As a result, comparisons of valuations and margins based on EBITDA are most likely to make sense for companies within the same industry with comparable investments and leverage levels.
Although EBITDA is hardly suitable for corporate management, its application has established itself in many international companies. Please note, however, that the calculation of EBITDA is not standardized in the various accounting systems (IFRS, US GAAP). Some companies misuse this fact and show "adjusted EBITDA" or "adjusted EBITDA" instead of EBITDA. The classification of business transactions as an event worthy of adjustment (e.g. lease payments, costs for legal disputes, restructuring, marketing campaigns, severance payments) is incumbent on the company and can be carried out very arbitrarily. It becomes particularly questionable when management is rewarded on the basis of an “Adjusted EBITDA”. You can then increase your compensation particularly quickly through large takeovers: Neither depreciation (on possibly excessive purchase prices) nor the cost of capital for financing are taken into account in the calculation.
Particularly at the time of the Neuer Markt , the adjusted EBITDA was used by some unprofitable companies to cover up a loss situation, as it may still deliver positive values by adjusting the result for numerous expense items. Such reporting was supported by the ability to post sales prior to the actual delivery of goods and invoicing. The EBITDA can also be artificially increased through the optional activation of own work . In extreme cases, a company can report a positive EBITDA without having actually generated an inflow of cash.
In the meantime, even legislators have upgraded the importance of EBITDA; it is part of tax law. The regulation known as the interest barrier restricts the deductibility of the net interest expense to an amount that is a maximum of 30% of “earnings before interest, taxes, depreciation on property, plant and equipment and depreciation on intangible assets (EBITDA)” (see Section 4h EStG ).
Trivia
After the balance sheet falsifications at ENRON in 2001, EBITDA was sarcastically reinterpreted as E arnings b efore I t ricked the d umb a uditor (profit before I deceived the stupid auditor ). Terms such as EBBS (Earnings Before Bad Stuff) or EBA (Earnings Before Anything) are also common.
swell
- ↑ Jürgen Weber, Introduction to Controlling
- ↑ Gabler Wirtschaftslexikon in 8 volumes, Volume Bf-E
- ↑ Fredmund Malik, manager-magazin.de, criticism of the incorrect use of EBITDA
- ↑ Example: SLM Solutions Group reported an “adjusted EBITDA” of € 2.5 million for 2013 with an operating cash flow of € −0.5 million and a free cash flow (before financial investments) of € −1.7 million; see securities prospectus for the IPO , April 25, 2014, accessed on April 25, 2014, page 38 and F-6