What is a company's EBITDA
EBITDA - key figure for the company's profitability
Investors can use a variety of business metrics to assess a company's profitability.
Such key figures are particularly interesting if you are looking for an attractive security with good prospects for returns.
The so-called EBITDA is such a key figure that makes it possible to assess the operational profitability of a company.
The term comes from English and stands for Earnings Before Interests, Taxes, Depreciation and Amortization.
That means roughly: Earnings before interest, taxes, depreciation on property, plant and equipment (e.g. machinery) and depreciation on intangible assets (e.g. goodwill).
This key figure is very informative in terms of operating income and can therefore be used, for example, to evaluate corporate bonds.
More on the subject:Corporate Bonds: The Three Most Helpful Metrics
Calculation of EBITDA
Another important key figure for company valuation is EBIT, which is used as the basis for calculating EBITDA.
The EBIT is calculated by adding the tax expense to the annual surplus or subtracting tax income in the first step.
In a next step, the value is adjusted for interest. The interest expense is added or interest income is subtracted. The result is the EBIT.
Now the depreciation on tangible and intangible assets and assets is still missing: Depreciation is added, write-ups are deducted.
Now the result is the EBITDA. Further values such as EBITDAR and EBITDARM can be derived from this value, which can be useful in certain contexts.
More on the subject:Differences between EBITDA, EBITDAR and EBITDARM
If used correctly, EBITDA itself can be very meaningful. However, there are a few factors to consider when assessing this metric.
Interpreting EBITDA correctly
The great advantage of EBITDA is that companies can be compared on an international basis with the help of this key figure.
The national accounting laws regarding taxes, interest and depreciation are hereby largely excluded. What remains is the operating profitability.
Put simply, one can say that EBITDA provides information on whether a company is profitable in the absolute core area of its activity - namely, for example, in the production and sale of its goods.
The financing structure is not taken into account, as the relevant values are not taken into account in the calculation.
In a very generalized way, one can say that EBITDA is limited to this question: What does production cost and how high are the sales revenues?
However, this advantage is also the disadvantage of this key figure. Ultimately, the financing structure of a company with all relevant items also belongs in a solid assessment.
For example, appropriate investments are necessary to ensure the long-term success of a company. However, such a value is not taken into account in EBITDA.
See EBITDA in the right context
When looking for a suitable investment, you should never rely on a single key figure.
There are a large number of different key figures which, taken together, can provide a good basis for decision-making.
More on the subject:Balance sheet analysis: read key figures correctly
The EBITDA definitely has its raison d'etre. The fact that many positions are not taken into account is both an advantage and a disadvantage.
In the right context, i.e. in connection with other important key figures and analysis methods, EBITDA is an important number for a solid investment decision.
Schaltbau has a good start to the year and good prospects The German transport technology specialist Schaltbau has significantly improved its profitability in the first quarter of the current year. > read more
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