EBITDA - what is it in simple terms? The formula for calculating the indicator. Indicators ebit and ebitda: features of the calculation according to ifr reporting data Difference between ebitda and oibda
Free float (free float) the number of shares in the company actively traded in the market, with the exception of shares held by management and the largest shareholders of the company, since agreements have been entered into with respect to these shares prohibiting their sale until they are offered to someone else.
IPO (Initial public offering) – initial public offering (initial public issue). The first public offering of the company's shares (in the Russian Federation - OJSC) on the stock exchange.
IR (Investor Relations) - investor relations. The work of a company (in particular, shares or bonds of which are listed on the stock exchange) to establish and maintain a constant dialogue and effective interaction with the investment and analytical community. The strategic goals of IR are to increase the investment attractiveness of the company by increasing its information openness and transparency, forming a deep and objective understanding of the prospects for business development, creating and maintaining a positive image.
OIBDA (operating income before depreciation & amortization
)
– « Operating profit before deduction depreciation charges". To use RAS terms: OIBDA is calculated as revenue minus operating expenses (prime cost + administrative expenses) excluding depreciation (depreciation of fixed assets + depreciation of intangible assets).
When calculating OIBDA according to IFRS reporting: disposal and impairment may also be included in the calculation, if any. In this case, the company calculates OIBDA as operating profit before amortization (MA + intangible assets), impairment of non-current assets (fixed assets, goodwill and other intangible assets) and loss (profit) on disposal of fixed assets.
OIBDA is not a metric calculated in accordance with formal U.S. standards. GAAP or IFRS.
However, OIBDA provides important information to investors, as it reflects the state of the company's business, including the ability to finance investments, as well as the ability to raise debt and service debt.
EBITDA (earnings before interest, taxes, depreciation & amortization) - the company's profit before deduction of income tax, interest and depreciation. Unlike the OIBDA calculation, there are different approaches to calculating EBITDA, which consist in different interpretations of the concept of “earnings” - therefore, in each case it is important to know the calculation algorithm.
Stock- registered security, securing the rights of its owner (shareholder) to receive part of the profit joint stock company in the form of dividends, for participation in the management of the joint-stock company and for part of the property remaining after its liquidation. A share is a registered security.
Ordinary share - a non-documentary registered securities granting its owner the right to participate and vote at the general meeting of shareholders of the company, the right to receive dividends and part of the company's property in the event of its liquidation (liquidation value), as well as other rights in accordance with the Charter and / or legislation.
Preferred share - an issue-grade uncertified registered security granting its owner the right to receive a specified amount of dividend, receive a certain liquidation value before the owners of ordinary shares receive a similar value, as well as other rights in accordance with the Charter and / or legislation. Unlike common share does not provide the right to participate and vote at the general meeting of shareholders, except for the cases specified in the legislation.
Joint Stock Company (JSC)
- society, authorized capital which is divided into a certain number of shares; members of a joint-stock company (shareholders) are not liable for its obligations and bear the risk of losses associated with the activities of the company, within the value of their shares.
JSC can be of two types: closed (JSC) and open (JSC).
Stock Closed joint stock company distributed only among the founders or a predetermined circle of persons (as opposed to OJSC). The shareholders of such a company have a preemptive right to purchase shares sold by other shareholders. The number of CJSC members is limited by law. As a rule, a closed joint-stock company is not obliged to publish statements to the public, unless otherwise provided by law.
Number of shareholders Open joint-stock company not limited, shares are distributed among an unlimited number of persons (open subscription), the preemptive right to purchase shares alienated by other shareholders is not allowed. Open joint stock companies are obliged to disclose information about their activities in the amount and forms required by the legislation of the Russian Federation, the regulator (and the stock exchanges) - shares of an OJSC can be traded on the stock exchange, and in this case the OJSC becomes a fully public company.
Share capital - the sum of all assets of the company minus the sum of all its liabilities. Firm balance sheet item showing book value share capital. It includes the actual share capital, i.e. the company's capital in the form of shares, additional capital and retained earnings.
Audit- control function of correctness of drawing up financial documents... The purpose of the audit is to express an opinion on the reliability of financial statements and the compliance of the accounting procedure in the audited organization with the current legislation. Distinguishes between internal and external (independent) audit.
Audit report - the opinion of an independent audit firm regarding the reliability of the presented financial statements, that is, the degree of its accuracy, which allows the user of the statements to draw correct conclusions about the results economic activity, financial and property status of the audited organization.
Beneficial owner of securities (beneficiary) > - a person who is directly the owner of securities, to whom the securities belong on the basis of ownership or other property rights, regardless of the name in whose name such securities are registered.
Exchange (stock exchange) – professional participant the securities market that meets the statutory requirements, which carries out activities to organize trade in the securities market, to provide services that directly contribute to the conclusion of civil transactions with securities between participants in the securities market.
Volatility - variability of the rate (price) of a certain financial instrument for a selected period of time. Measurement of price fluctuations - usually as a percentage.
Register Closing Date - the date determined by the Board of Directors for compiling the list of persons entitled to participate in the General Meeting of Shareholders and receive dividends for the past / past year (in the case of an AGM).
Depositary - a legal entity, a professional participant in the securities market, carrying out depository activities, i.e. provision of services for the storage of securities certificates and / or accounting and transfer of rights to securities.
Depositor- a person using the services of a depository for the safekeeping of securities and / or registration of rights to securities.
Dividends- part of the Company's net profit based on the results of the financial year, distributed among shareholders in proportion to the number of shares of the corresponding type held by them. The decision to pay dividends on ordinary (voting) shares of an Open Joint Stock Company is made by the Board of Directors of the company. Holders of preferred shares receive the specified amount of dividends on a mandatory basis.
Dividend Yield - the percentage rate of income paid on shares in the form of dividends (annual dividend on a share divided by its current market value).
Insiders- directors and senior officials of the corporation. In reality, they are those who have access to inside information about the company. An "insider" is also called someone who owns more than 10% of the voting shares of a company.
Capitalization ( market capitalization company) - the total value of all shares in circulation. Calculated as the number of shares multiplied by their market value (recognized quote as of the date of interest).
Quotation- numerical value - price, rate, interest rate at a certain financial instrument, announced by the seller or the buyer (bid and ask prices at which the dealer is ready to make a purchase or sale transaction).
Cumulative voting - voting procedure, in which the number of votes belonging to each shareholder is multiplied by the number of persons to be elected to the Board of Directors (Supervisory Board) of the Company, and the shareholder has the right to give the votes thus obtained in full for one candidate or distribute them between two or more candidates.
Liquidity of securities - the characteristic of securities, determined by the possibility of a quick sale or purchase of an asset in large volumes, which will not lead to a significant change in their price.
Listing of securities - inclusion by the stock exchange of securities in the quotation list for the organization of trading in such securities.
Margin / margin - the ratio of profit to sales revenue, expressed as a percentage (operating profit margin, net profit margin, EBIT margin, OIBDA, etc.). Sometimes the term "rate of return on ..." is used.
Nominee holder of securities - a person to whom securities are registered in the register keeping system, but who is not the owner of these securities. A nominee holder of securities can exercise the rights secured by a security only if he receives the appropriate authorization from the owner.
General Meeting of Shareholders (GMS) - a meeting of shareholders of the Company (JSC), as well as proxies of shareholders to make decisions on issues related to the competence of the meeting of shareholders in accordance with the Charter of the company and / or the legislation of the Russian Federation. OCA can be annual(next) - based on the results of the ended financial year, and extraordinary.
Trade organizer - a professional participant in the securities market, carrying out activities for the organization of trading in the securities market, i.e. on the provision of services that directly contribute to the conclusion of civil transactions with securities between participants in the securities market.
Profit and loss statement (income statement) - a report that indicates income, expenses and profit (the difference between income and expenses) of the company for a certain period of time.
Governing body- a collegial executive body that manages the company's current activities on issues within its competence in accordance with the Charter and / or legislation, and is accountable to the board of directors and the general meeting of shareholders.
Earnings per share (EPS) - the company's net profit divided by the number of its shares outstanding.
Placement of securities – see Issue,IPO.
Registrar (registrar) - a professional participant in the securities market that maintains the register of holders of the company's registered securities, i.e. on the accounting of the rights of securities holders and nominal holders of securities in relation to securities registered in their name, in the system of maintaining the register of securities holders.
Register of owners of securities (register of shareholders) - a set of data recorded on paper and / or using an electronic database, which ensures the identification of nominal holders and owners of securities registered in the system of maintaining the register of securities holders and accounting for their rights in relation to securities registered in their name, allowing to receive and send information to the specified persons and draw up a register of securities holders.
Profitability - an indicator of the economic efficiency of production, calculated as the ratio of profit to costs or production costs.
Board of Directors - the governing body of the Company, which carries out general management of the company's activities on issues related to its competence in accordance with the Charter and / or the legislation of the Russian Federation.
Ticker- code, system designation, of a security in the quotation lists of organizers of trading in securities and stock exchanges. HSCI ticker on MICEX - ISKJ.
The charter- the main constituent document of the company, the requirements of which are binding on all bodies of the company and its shareholders.
Authorized capital of a joint stock company - the aggregate par value of all issued shares of the company acquired by shareholders.
Federal Service for Financial Markets (FFMS) - the federal executive body performing the functions of adopting normative legal acts, control and supervision in the field financial markets(excluding insurance, banking and audit activity). FFMS was created on the basis of the abolished Federal Commission on securities RF (FCSM).
Stock index
- An index that tracks fluctuations in the rates of a certain set of securities on the exchange. For example, S&P 500, NYSE Composite, NASDAQ Biotechnology, MICEX Index,
MICEX corp region ...
Issuer- a legal entity or executive authorities or local self-government bodies that bear obligations on their own behalf to the owners of securities to exercise the rights enshrined in such securities.
Issue of securities - the legally established sequence of actions of the issuer for the placement of equity securities, i.e. on the alienation of equity securities by the issuer to the first owners through the conclusion of civil transactions.
Somehow we talked on Skype with foreign colleagues about the analysis of business efficiency.
Friends often used the word EBITDA (in Russian, how it sounds!).
I, with a sinful deed, at first thought that they wanted to show off their knowledge of the literary Russian language, but then I remembered that once during my studies I heard about such an indicator of profitability with a funny name.
In order not to seem like a non-professional, I had to update my knowledge on this issue with the help of the almighty World Wide Web, although this indicator is not considered indicative in our country, sorry for the tautology. The results were compiled into an article.
EBITDA
Definition
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) - profit before interest, taxes and depreciation.
EBITDA measures the financial performance of a company, excluding the effects of capital structure (ie interest paid on borrowed funds), tax rates and the organization's depreciation policy.
EBITDA provides a rough estimate of cash flow by excluding the “non-cash” expense item such as depreciation and amortization. The indicator is useful when comparing enterprises in the same industry, but with different capital structures.
EBITDA, in turn, is widely used as a component of various financial performance ratios (EV / EBITDA, return on sales, etc.). Investors are looking at EBITDA as an indicator of the expected return on their investment.
Calculation
EBITDA = Profit (loss) before tax + (Interest payable + Depreciation of fixed assets and intangible assets)
There is a misconception that this indicator is calculated from the balance sheet of the organization. In fact, EBITDA can be calculated according to the data of the "Profit and Loss Statement" ("Statement of Financial Results"), however, in addition, the amount of depreciation of fixed assets and intangible assets, which is not contained in the specified reporting form, is required.
Negative EBITDA indicates that the organization's activities are unprofitable already at the operating stage, even before payment for the use of borrowed capital, taxes, and depreciation.
EBITDA margin
EBITDA is also used to calculate the EBITDA margin:
EBITDA margin = EBITDA / Sales revenue
This ratio reflects the profitability of the company before interest, taxes and depreciation, and, unlike EBITDA itself, is not an absolute, but a relative indicator.
Source: https://www.audit-it.ru/finanaliz/terms/performance/ebitda.html
EBITDA INDICATOR
The financial EBITDA ratio is used to determine the company's ability to meet its obligations. In addition, financial analysts use this indicator to determine the value of a business (in the EVA model).
EBITDA translates as Earning before interest, dividend, tax, amortization, which literally reads gross profit before interest, dividends, taxes, depreciation.
For the correct calculation of EBITDA, you need financial statements that are made in accordance with IFRS ( international system financial statements).
In other words, EBITDA shows the company's income, i.e. cash that the company has gained in the reporting period. This metric is used to measure the return on investment in yourself.
However, this indicator has its drawbacks. It is impossible to calculate EBITDA in Russian financial statements (RAS), since the formula was developed for financial statements prepared in accordance with IFRS and GAAP standards.
The approximate calculation of EBITDA is as follows:
EBITDA = Profit from sales + depreciation charges
In other words, the indicator reflects the profit of the enterprise before taxation and depreciation expenses of fixed assets.
EBITDA is important for financial analysis. Along with EBITDA, EBIT (profit before taxes and interest on loans), EBT (profit before taxes), NOPLAT (net profit minus taxes), OIBDA (operating profit minus depreciation) are used in the analysis.
Source: http: //site/finzz.ru/pokazatel-ebitda.html
What is EBITDA?
The calculation of EBITDA is quite simple - you need to add depreciation to the EBIT value.
Formula
EBITDA in Russia (in Russian practice) can be obtained as follows:
EBITDA = EBIT + Amortization deductions for material and intangible assets- Revaluation of assets
EBITDA is more popular with international investors and rating agencies than the net profit indicator.
This demand for EBITDA is mainly due to three factors:
- The first factor is the difference in taxation systems, including income tax rates.
- The second factor is the differences in the adopted methods and methods of depreciation.
- The third factor is variation in terms of delivery credit funds(terms, interest, etc.) by banking institutions.
These three factors find their cumulative expression in the amount of net profit received by the company, and accordingly affect the EBITDA indicator.
It would be incorrect to compare companies of the same specialization, but located in different countries, in terms of net profit. Comparability and objectivity can be achieved by eliminating cross-country differences in taxes, loans and depreciation.
The use of EBITDA and EBITDA ratios allows for correct comparisons and objective investment decisions.
I would like to note that the performance results of the largest US companies, which are reflected in the annual reports, are primarily assessed (1) in relation to the company's share price to earnings; (2) cash flow and (3) EBITDA. In Russia, the question is no longer how to calculate EBITDA.
All Russian companies, whose shares are quoted on foreign stock exchanges, or have foreign investors / creditors, or planning an initial issue of shares, use these and many other indicators and coefficients for analyzing financial and economic information.
These Russian companies include Gazprom, Surgutneftegaz, LUKOIL, FGC UES, Norilsk Nickel, Sberbank, Magnit, X5 RetailGroup, Vimpelcom, MTS, Mail.ru Group ”,“ Gazpromneft ”,“ Rosneft ”,“ Tatneft ”, Novatek. The calculation of EBITDA in such companies is carried out on a regular basis.
It should be emphasized that these and many other companies prepare financial statements in accordance with international standards (IFRS), and accordingly calculate EBIDTA in accordance with IFRS.
Almost half of the 100 largest Russian companies in terms of sales have switched to IFRS standards. Small and medium-sized businesses in most cases do not use EBIT and EBITDA indicators in their practice.
Moreover, even if this or that business structure has heard about these indicators, then how to calculate EBIT / EBITDA using Russian financial reports, this structure doesn't know. Few of the representatives of small and medium-sized businesses have switched to IFRS.
Accounting in accordance with IFRS promises entrepreneurs significant advantages in terms of the development of international cooperation (EBITDA is one of the most important indicators that foreign counterparties take into account), participation in seminars and trainings, the availability of foreign, cheaper, credit funds, as well as obtaining a more objective assessment of their own business.
Russian practice
In general, EBIT / EBITDA in Russian practice is still only widespread among the largest companies in the raw materials sector.
The massive transition of Russian companies in all sectors of the economy and of all sizes to IFRS will be the most important and necessary condition for an influx foreign investment into the country's economy, its qualitative growth and, ultimately, an increase in the standard of living of Russians.
Pros and cons of the indicator
The use of EBITDA to measure a company's performance depends on the objectives of the intended analysis.
Attention!
EBITDA hides a number of factors that are associated with the volume of the enterprise's activities, with the volume of investments, the burden on capital ( debentures), as well as tax incentives.
However, the calculation of EBITDA does not take into account the cost of compensating for the depreciation of machinery, equipment and structures (depreciation charges).
This can have a negative impact, because the costs of maintaining the means of production in one way or another have to be borne, albeit in a different time perspective. Accordingly, when analyzing for a long-term period, EBITDA should be replaced by OIBDA.
EBIT
EBIT is not just an abstract number. This indicator is the basis for evaluating a business; the price that a potential buyer can offer for a particular business, multiplying EBIT by a certain multiplier.
In the West, for small and medium-sized enterprises, such a multiplier ranges from 3-5. In other words, a good business can be valued at 3-5 times EBIT.
Given the importance of the metric, it is prudent to first figure out how to calculate EBIT.
It should be borne in mind that there are certain differences in the calculation of EBIT between Russian companies using national accounting standards (RAS) and Western companies applying international standards (IFRS).
EBIT formula
If we take international standards as the basis for calculating EBIT, then this indicator can be determined by subtracting direct costs of production from the proceeds:
EBIT = Revenue of the company - Direct costs
Essentially, EBIT is the gross profit of an enterprise. The calculation of EBIT in Russia (in Russian practice), that is, based on Russian accounting standards, is carried out taking into account such items as income tax refunds, extraordinary income and expenses, and interest received.
Accordingly, to obtain a Western analogue of EBIT, it is necessary:
- determine the net profit of the enterprise;
- to identify the amounts of net income tax, deducting the amount of tax that was reimbursed from the amount of paid income tax;
- establish the amount of net interest, deducting the amount of interest received from the amount of interest paid;
- deduct from the amount of extraordinary expenses the amount of extraordinary income.
EBIT = Net Income + Income Tax Expense - Income Tax Reimbursed + Extraordinary Expenses - Extraordinary Income + Interest Paid - Interest Received
EBIT is of particular interest to banking institutions. Credit institutions interested in high EBIT.
After all, this means that the company is able to attract and service loans and, under the circumstances, can be exempted from paying income tax.
However, one should not forget that in this case the company will actually work for creditors, giving all the profits to repay loans.
Moreover, the positive value of EBIT does not guarantee that such an important indicator of the company's performance as cash flow from operating activities will also be positive.
Due to the limited nature of this indicator, when evaluating a company, investors use another indicator - EBITDA (calculating EBITDA is slightly more complicated than calculating EBIT), as well as the OIBDA indicator, which is considered the most transparent.
Source: http: //site/finance-m.info/articles.html? Id = 4
EBITDA - what is it?
EBITDA first became known in the mid-1980s. EBITDA was used to analyze the leveraged buyout (LBO) - the purchase of a controlling stake in corporations using a loan.
The financial EBITDA figure helped to quickly calculate whether these companies could pay interest on the transactions they were financing.
The reason for the emergence of the financial indicator of EBITDA was the fact that in the 1980s, when there was a fever of buyout / takeover with borrowed funds, many companies did not pay the fair market price for assets.
EBITDA provided an opportunity to measure the profitability generated by the company. And knowing the profitability, the investor could judge whether it was sufficient to pay off the arisen debt or not.
This indicator should be used in combination with others, as it also has disadvantages, which will be described below.
Today EBITDA is used by companies across all industries. The relevance of the indicator for use is very simple:
It is quickly and easily calculated using an open source of information (forms accounting statements), gives the first "impression" of the course of the business. It is partially influenced by the accounting policy of the enterprise, and tax rates and do not affect at all.
In the 1980s, no one thought about the further development of the acquired enterprise, therefore its shortcomings (does not take into account the volume of capital investments and working capital necessary to increase activity) were leveled (was insignificant).
Attention!
Currently, EBITDA is used by many directors of unprofitable companies to distract shareholders from the negative results of their activities.
The indicator is good as a "first date" with a company, as well as for comparing companies from the same industry, but different countries. EBITDA is a good measure of operating profitability, but not cash flow.
Unfortunately, EBITDA is often used as a measure for cash flow, which is very dangerous and misleading for investors.
You need to know this, because there is a significant difference between them. Operating cash flow is the best measure for cash flow, but that's another article.
EBITDA is an acronym for Earnings before Interest, Taxes, Depreciation and Amortization, which translates as earnings before interest on loans, taxes, depreciation (amortization of long-term tangible assets) and amortization (intangible).
EBITDA does not represent net income, does not measure liquidity, and is not part of generally accepted accounting principles. Businesses are free to publish this metric at their discretion. Although now more and more companies are using it.
This indicator is easily calculated according to International Financial Reporting Standards (IFRS), but we will also consider how it can be calculated using the financial statements of Russia and Ukraine.
The EBITDA formula for IFRS is:
EBITDA = EBIT + Depreciation + Amortization
EBIT = Revenue - Cost
Let's take a hypothetical look at P&L for Company XYZ:
- Income Statement - the main financial declaration of income (an official document containing information about the income of its author, usually for tax purposes)
- Sales Revenue - sales revenue
- Salaries - salary
- Rent & Utilities - rent and utilities
- Depreciation - wear
- Operating Profit - operating profit
- InterestExpense - interest on loans (payable)
- Earnings Before Taxes - profit before taxes
- Taxes - tax
- Net Income - net profit
To calculate EBITDA, we find the line items for EBIT ($ 750,000), depreciation ($ 50,000) and amortization (N / A) and then use the formula above:
EBITDA = 750,000 + 50,000 + 0 = $ 800,000
Since EBITDA is calculated in accordance with IFRS, the result of calculation according to Russian Accounting Standards (RAS) and Ukrainian Regulations (Standards) of Accounting (UP (S) BU) will be approximate.
For Ukrainian standards
EBITDA = Ф2 (2290 - financial result before posting) + Ф2 (2250 - financial vitrati) + Ф2 (2515 - depreciation)
For Russian standards
EBITDA = Ф2 (2110 - revenue) - Ф2 (2120 - cost price) = Ф2 (2100 - gross profit) - Ф2 (2210 - selling expenses) - Ф2 (2220 - administrative expenses) = Ф2 (2200 - profit from sales) + Ф5 (5100 (10) - accumulated depreciation) + Ф5 (5200 (10) - accumulated depreciation)
Conclusion
It is a common misconception that EBITDA represents cash income. EBITDA is a good indicator of our profitability, but not our cash flow.
Financial EBITDA also excludes cash required to finance working capital and replace old equipment, which can be significant.
The company can make the financial picture more attractive by touting EBITDA, shifting investor attention away from high debt and unsightly expenses against earnings.
Be careful: a company that does not pay its government taxes or service its loans will not stay in business for long.
Unlike adequate cash flow measures, EBITDA ignores changes in working capital, funds required to cover day-to-day transactions.
So, for example, if the debtor took the goods, and pays in a week, then the proceeds will be the cost of the goods sold, but in fact the money was paid by the seller from its working capital. Critics notwithstanding, there are many who prefer this convenient equation.
Financial EBITDA can be used as a “shortcut” to estimate the cash flow to pay off debt on long-term assets such as equipment and other items with life expectancy measured in decades rather than years.
To estimate the EBITDA indicator was accurate enough, first calculate the profitability. EBITDA can also be used to compare companies against each other and against industry averages.
Despite its widespread use, EBITDA is not defined in GAAP - as a result, companies can report EBITDA however they want. The problem with doing this is that EBITDA does not provide a complete picture of a company's performance.
In many cases, investors are better off avoiding EBITDA or using it in conjunction with other, more meaningful metrics. Lack of profitability is not a good sign of business health regardless of EBITDA.
A good analyst understands these facts and uses the calculations accordingly in addition to his or her brand and individual assessments. EBITDA does not exist in a vacuum.
Bad reputation is more the result of overuse and misuse than anything else.
Just as a shovel is effective for digging holes, but will not be the best tool for tightening screws or inflating tires, so should not be used as a “one size fits all”, standalone tool for assessing corporate profitability.
This is an especially valuable point when you consider that the calculations of financial EBITDA are not consistent with generally accepted accounting principles (GAAP). EBITDA is one of the most commonly used operational measures by analysts.
EBIDTA allows analysts to focus on the results of operational decisions while excluding the impact of non-operational decisions like interest expenses (financing decisions), tax rates (government decisions), or large non-monetary items such as profit and amortization (accounting decisions) ...
However, EBITDA can also be deceiving when applied incorrectly. The use of the indicator is especially inappropriate for firms burdened with high debt burdens or those who have to continuously update expensive equipment.
And lastly, finance is like perfume - it smells good, but it tastes ...
Source: https://madgicbox.com/finansovie-pokazately/pokazatel-ebitda-chto-eto-takoe/
Should you use EBITDA when evaluating financial results?
EBIDTA is controversial in terms of its validity. This indicator was very much criticized and criticized until now, but the question arises: "Why is it still one of the most frequently used in the analysis of the financial results of organizations?"
It is used by business leaders, shareholders, ordinary managers and almost everyone who comes across company reports.
In the article, we will briefly analyze the essence, meaning, main pros and cons of EBITDA, as well as the simplest method for calculating it according to Russian financial statements and the scope of application.
What is EBITDA and how to calculate it?
In order to give a concise definition of EBITDA, simply decipher and translate it.
EBITDA (from English - Earnings Before Interest, Taxes, Depreciation and Amortization) in translation means: income before interest, taxes and depreciation.
In the English wording, it seems, four indicators are deducted, in the Russian - only three. Where did the other one go?
The British denote depreciation in two words: depreciation - depreciation of tangible assets and amortization - depreciation of intangible assets. We mean these indicators as a whole.
What is EBITDA and how is it calculated? In general, this value reflects the income received by the company from the main operating activities.
This does not take into account:
- the amount of investment in production (adjustment for the amount of accrued depreciation);
- tax regime (income tax adjustment).
Typically, EBITDA is calculated by adjusting the company's net profit for interest receivable / payable, income tax, depreciation and other non-operating income and costs.
But there is also a second option for calculating this indicator, which is made using the formula: EBITDA = Revenue - Operating expenses (excluding depreciation costs)
The second option looks simpler, both from the point of view of calculations and from the point of view of understanding. This value gives us an idea of how many kopecks of profit from core activities the company received from each ruble earned for the products sold / services rendered.
The secret of popularity
Why exactly EBITDA is so popular with executives, financiers and analysts?
After all, there is, for example, an indicator of operating profit, which differs only in that when calculating it, operating expenses deducted from revenue include depreciation. Let's try to figure it out with an illustrative example.
Example 1. Suppose there are two confectionery manufacturers:
- producer A - provides buns to the population of one microdistrict, producing an average of 1000 units. products per day. Company A has 1 small bakery with 5 people. The bakery was purchased at the expense of the founders of the enterprise for 100 thousand rubles, no loans. The company is on a simplified taxation system, income tax is paid at the rate of 15% of net profit;
- Manufacturer B - supplies a small town with products, baking 10 thousand buns a day. Company B has several workshops worth 500 thousand rubles. and 50 employees in production. The company has taken out a loan in the amount of 500 thousand rubles. at 15% per annum with full payment in three years. All production equipment was purchased with these funds. The company is located on common system taxation and pays 20% income tax.
Let's calculate the financial results of both companies for the year. In this case, we will conditionally consider:
- both manufacturers work 350 days a year;
- the cost of 1 bun for both - 1 ruble;
- the amount of operating expenses for 1 bun - 50 kopecks;
- the equipment amortization period for both companies is 5 years.
That is, the considered enterprises differ only in the scale of their activities, sources of financing and taxation systems (Table 1).
From table. 2 shows that the EBITDA margin for both companies is the same (0.5%), but the subsequent indicators differ: the operating profitability of company A (0.44%) is lower than that of company B (0.47%) due to the relatively large depreciation charges.
However, the net profitability is higher due to the lower tax burden and the absence of loans. Of course, this example is very simplistic. For clarity, consider another example.
Example 2. Let's present in table. 3 financial results of several leading food retailers in Russia for 2011
Please note that the EBITDA margins of the O'Key and Magnit groups are the same, but the difference with other retailers is relatively small.
At the same time, deviations in operating and net profitability indicators are noticeably higher and amount to more than 2% (see “Maximum deviation” in Table 3).
As an additional illustration, you can also take the data on the Big Three operators for 2011 (Table 4).
Table 4, there were significantly larger deviations in various indicators of profitability. Nevertheless, EBITDA profitability ratios have the closest values to each other. The maximum deviation for them is the smallest in comparison with other indicators.
These examples clearly demonstrate the main advantage of EBITDA. It lies in the fact that with the help of this indicator it is possible to compare the financial results of various enterprises operating in the same industry.
At the same time, their size, debt burden or the applied tax regime are not important. Only the type of activity and operating results matter.
Who will benefit from this indicator? First of all, to external consumers of information: investors, analysts and all those who want to compare one company with others working in the same field.
Attention!
EBITDA margin is one of the main criteria by which you can determine whether entity A is worse or better than entity B.
From this point of view, this indicator is useful for assessing their own business and internal consumers of information - financial managers, managers and shareholders of the analyzed organizations.
Hidden threat
Another reason why EBITDA has gained widespread acceptance is that it excludes depreciation and amortization costs. Depreciation is charged on the cost of fixed assets in accordance with the approved norms.
For example, the initial cost of a passenger car is amortized, that is, written off as an expense, over three years.
This means that, having bought a car for 300 thousand rubles, we will write off its cost for 100 thousand rubles. in year. These 100 thousand rubles. will be reflected in the income statement as an expense.
But in reality this money is not spent anywhere, and we will not give it to anyone. For this reason, many consider amortization to be a paper expense that is reflected only in the financial statements, but not actually spent.
Therefore, it turns out that EBITDA reflects the actual operating profitability of the company.
This is where the main danger of this indicator lies. No wonder one of his main critics is Warren Buffett, the famous American investor. He owns the phrase: "Do managers think that the capital costs are borne by the tooth fairy?"
Mr. Buffett meant that the income statement does not reflect the amount spent on the purchase of assets - real estate, equipment, vehicles and anything that will be constantly used for several years.
That is, the investment activity of the company remains practically unattended. But almost all assets tend to age, wear out and lose value. And over time, old equipment must be replaced with new ones.
For example, if we are engaged in transportation, then we must keep in mind that in 3-5 years the cars will require major repairs or replacement.
Money to cover these costs should be set aside today. Otherwise, after the expiration of this period, it will be possible to close the enterprise.
It turns out that by ignoring depreciation, we deny the need to replace or overhaul our fixed assets in the future.
History knows many examples of bankruptcies of companies whose managers, by mistake or by malicious intent, embellished financial results based on EBITDA.
Therefore, using EBITDA, one must not forget that depreciation is not just a paper expenditure of an enterprise, but a real reflection of the need for renewal. production assets(operating and bottom line are just as important, not to mention there are better metrics to track).
Easy way to calculate
The EBITDA indicator has a right to life, despite such a significant drawback, at least in order to assess the company's success against the background of competitors (especially since it is not difficult to calculate this indicator).
In Russian financial statements, in general, it is calculated by adding the amount of amortization accrued for the reporting period to the profit from sales (page 2200 of the OPU).
For example, if the profit from sales for the first half of the year was 1,000 rubles, and depreciation for this period was accrued in the amount of 100 rubles, then EBITDA will be 1,100 rubles.
Unfortunately, the RAS income statement does not indicate the amount of depreciation as part of operating expenses.
To find out, you will have to use either the appendix to the reporting, where the main expenses may be indicated, or accounting transcripts.
Conclusion
Should you use EBITDA when evaluating a company's financial performance? Perhaps, there is no definite answer, since everything depends on the goals of the analysis being carried out.
EBITDA does not take into account factors related to the size of the enterprise and the volume of investments in it.
It ignores the debt burden on the organization and the taxation system applied in it, but takes into account the parameters related only to operating activities.
Therefore, this metric is excellent for analyzing and comparing different enterprises operating in the same industry, as well as for assessing the company's net operating results.
However, when calculating EBITDA, depreciation costs are not taken into account, which are almost impossible to avoid due to the deterioration of machinery, equipment and other assets.
Ignoring depreciation can lead to a lack of money when it is necessary to update fixed assets. Therefore, EBITDA should not be used if the task is to analyze the organization's activities in the long term.
Based on these reasons, it can be concluded that the concept of EBITDA should be used with caution, not forgetting to pay attention to other indicators of the organization's profitability.
You should always remember that sooner or later the moment will come when the company will need to update its production facilities. And this, of course, will require money.
Source: https://www.profiz.ru/peo/12_2012/primenenie_ebidta/
EBITDA calculation formula
One of the indicators of financial statements is EBITDA (an abbreviation from the English name "earnings before interest, dividend, tax and amortization", which translates as "profit before interest, dividends, taxes, depreciation").
In other words, the basis is the profit of the enterprise that is credited to the account even before it was taxed, depreciation deductions for the use of fixed assets were deducted, interest was paid on loans or loans, dividends were accrued.
Such indicators make it possible to understand how effective the enterprise was during the reporting period, what amounts can be spent in the next period of time.
This information will be useful when planning expenses for self-financing, for drawing up a company's budget. It will help you assess the return on investment and current investment in production.
It should be noted that reliable data will be obtained only when using extremely accurate accounting calculations, without using distorted facts. This is possible only if the accounting department of the company complies with the requirements of IFRS.
Consider the formula for calculating EBITDA, compiled in the case of compliance with the laws of IFRS and GAAP. The values of the terms are taken from Form No. 2, page 50
Net income + income tax payments - income tax refunded + incidental expenses - unplanned income + interest paid - interest received + deductions for tangible and intangible assets - asset revaluation = EBITDA.
Below is the calculation formula adapted to Russian standards reporting. This formula does not give an accurate result, since there are no initial data similar to foreign indicators. The values of the terms are taken from Form No. 5, page 50
Income from product sales + depreciation charges = EBITDA
The formula for calculating EBITDA may be required:
- If you are developing a start-up project and preparing papers for consideration by potential investors.
- If you took out a loan and are trying to calculate whether your current income is sufficient for the planned repayment of debts. This indicator reflects the solvency of the organization.
- This indicator is used by analysts and investors:
- to assess the financial position and value of companies;
- to evaluate organizations, companies traded among themselves on the stock exchange. The higher the ratio, the more likely the company is experiencing difficulties in paying off the debt on time.
Comparing these indicators between organizations with the same type of activity, you can understand which company is more stable and successful.
EBITDA is an indicator by which one can judge the profit of a company, regardless of external influences, for example, from the size of investments, from debt payments, from the tax regime in the region.
It shows the success and solvency of the company as a whole, in comparison with other similar organizations.
Economics is full of confusing terms in English. One of them is EBITDA (in Russian transcription EBITDA). In the article, we will consider what it is, how it is calculated and what it is needed for.
In order to assess the financial performance of an enterprise, there are many indicators. One of them is EBITDA. Since it is international, it is especially important to use it for those companies that have already entered or are just about to enter the global market.
What is EBITDA
Deciphering this term will help to better understand this concept. EBITDA is derived from the initial letters of the English financial term Earnings before Interest, Taxes, Depreciation and Amortization. Literally it can be translated as "profit before interest on loans, tax and depreciation charges." Using this term, you can assess how much the company is able to make a profit without taking into account the impact of loans, taxes and depreciation. In this way, investors can assess the profitability of their core business with an open mind.
This indicator is especially popular among large companies. It allows international conglomerates, which traditionally have large capital expenditures, to present their statements in a more favorable light compared to standard reporting.
Video - what is EBITDA in simple terms:
Investors pay special attention to EBITDA. The amount of real profit, calculated using this indicator, can significantly exceed the analogous indicator calculated using upfront costs. This is very important especially for those enterprises where the proportion of depreciation is high. In some cases, it reaches up to 30% of the production cost. This applies, first of all, to steel production.
Despite the fact that this indicator can distort the real state of affairs, investors still use it widely. This is due to the fact that it helps to assess the extent to which the company is able to service its debts and reinvest funds for the further development of the business.
History of the indicator in economics
EBITDA was originally used to assess the company's ability to service its obligations. To do this, the values of this indicator were compared for individual companies from the same industry, on the basis of which the amount of interest payments that will go to pay off the debt was calculated. From this point of view, the company was viewed as an asset that could be sold at an attractive cost.
At the same time, some nuances of calculating this indicator using this method can be noted. It was necessary to summarize the items that could be used to pay off the debt. At the same time, the costs of paying taxes could be taken as an additional basis for calculating debts, provided that all the company's net profit was directed to the same purpose, and the business turned into a loss-making one. As a result, the company ceased to function. On the other hand, the creditors had the benefit. This indicator was readily used in the 80s of the last century.
What EV / EBITDA Ratio Shows
Further, it is advisable to introduce the concept of EV and the EV / EBITDA ratio.
EV stands for Enterprise value, or company value. It can be defined as the sum of the capitalization of an enterprise and its debts. This is a benchmark that investors need to compare different companies.
EV / EBITDA ratio shows the company's value in terms of EBITDA. To calculate it, the following formula is used:
EV / EBITDA = (Capitalization + Long-term liabilities + Short-term liabilities) / Profit excluding taxes, interest and depreciation.
Settlement period is one year.
This indicator is used to compare companies with each other. With its help, investors can understand how the company is undervalued or overvalued by the market.
However, it is important to take into account the industry in which the evaluated enterprise operates. For developing industries, a higher rate is characteristic. EV / EBITDA for more traditional industries will be lower. The factor of the country of origin of the firm also has an impact on the value of the indicator. For example, the opposite situation is typical for developing economies, since traditional industries can develop at a faster pace than high-tech ones.
These factors should be taken into account when calculating the indicator.
Features and formula for calculating EBITDA
Since EBITDA is mainly used by companies that have already entered the global market, it is calculated according to international standards. This increases the competitiveness of domestic products, since in this case investors will have more complete information.
This indicator is not used in accounting. However, to calculate it, you need data from the financial statements. Since they are widely available, it compares favorably with other profitability indicators in the simplicity of the calculation.
To calculate EBITDA, you need to have the following information:
- net profit;
- income tax expenses and the amount of its reimbursement;
- extraordinary expenses and income;
- paid and received interest payments;
- depreciation deductions;
- revaluation of assets.
All of these indicators, except for the last one, form the operating profit (EBIT). It is required to calculate EBITDA. To calculate it, it follows from the gross profit of the company to deduct the costs of day-to-day activities. The following formula will help you calculate:
EBIT= Net income + tax expense - tax refunded + extraordinary expenses - extraordinary income + interest paid - interest received
EBIT can only be positive. Now you can calculate EBITDA too
EBITDA = EBIT + depreciation and amortization - asset revaluation
It should be noted that we calculated the indicator without taking into account payments: for taxes, debts and depreciation.
However, you can use a simplified formula for calculating EBITDA:
EBITDA = revenue - operating expenses
Also, the formula for calculating the indicator can be written as:
EBITDA = Income - Expenses + Taxes + Interest on debt + Amortization deductions
If you look at the data on the balance sheet in Form 2, then "Income" is taken from line 2110 "Sales revenue", and "Expenses", respectively, from line 2120 "Full cost". Lines 2410 + 2421 +/- 2450 form "Taxes", and line 2330 - "Interest on debt". With regard to depreciation deductions, their value should be taken from the Appendices or Explanations.
To make the formulas clearer, let's give an example. To do this, we will use a simplified formula. Let's say you want to calculate EBITDA for Romashka. To do this, we will use the formula:
EBITDA = Profit before tax (2300) + Interest paid (2330) - Interest received (2320) + Amortization
In the note to annual reporting indicated that the depreciation amount is 60,000,000 rubles.
Data of the statement of financial results of Romashka LLC for 2017.
Indicator name | Line code | Annual data (RUB) |
Profit (loss) from sales | 2200 | 332 673 919 |
Income from participation in other organizations | 2310 | 139 211 136 |
Interest receivable | 2320 | 67 912 187 |
Percentage to be paid | 2330 | 119 740 422 |
Other income | 2340 | 4 495 250 616 |
other expenses | 2350 | 4 283 878 698 |
Profit (loss) before tax | 2300 | 631 428 738 |
Then, EBITDA = 631 428 738 +119 740 422 - 67 912 187 + 60 000 000 = 743 256 973 (rub.)
According to the results of the calculation, it can be concluded that LLC "Romashka" is able to service its obligations, which form an annual payment on debts in the amount of no more than 743, 3 million rubles.
The advantages and disadvantages of using such an indicator
Among the advantages of using the indicator, we note the following:
- simplicity of indicator calculation and data availability;
- an opportunity to show the company's business in a more favorable light.
However, the following disadvantages of using EBITDA can be highlighted:
- the relative illegality of this concept. So, no accounting documents substantiate its existence, and the calculation formulas have no official documentation. This gives companies the ability to distort data;
- the calculation formula does not take into account many secondary factors and circumstances, which, nevertheless, can have a significant impact on the final result. Therefore, the indicator is inappropriate to use to determine the cash flow. For example, the formula does not take into account working capital, capital expenditures, depreciation costs.
These shortcomings suggest that EBITDA is not always appropriate to use to calculate the profitability of an enterprise.
Thus, the EBITDA score is of great importance for investors and company management to assess its profitability and competitiveness. However, often its values can be distorted, since the formula does not take into account some important data.
Video - about the features of using EBITDA:
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In this article, you will learn:
- What is EBITDA
- What are the disadvantages of the EBITDA ratio
- What are the Differences Between EBITDA and Operating Income
- What is the value of the company's EBITDA in the global market
- What are the EBITDA indicators
- How to calculate a company's EBITDA margin
- How to calculate EBITDA
- What are the features of calculating EBITDA according to IFRS reporting
The company's financial results are of great importance to both its management and shareholders and investors. Of interest are not only traditional indicators (revenue, net profit, volume of accounts payable and receivable), but also indicators of management reporting that are not applied either in RAS (Russian accounting standards) or in IFRS ( international standards financial statements). One of these indicators is EBITDA.
What is EBITDA of a company in simple language
Financiers in everyday life have many highly specialized terms that are incomprehensible to the uninitiated. For example, EBITDA. It is an English acronym that stands for earnings before interest, taxes, depreciation and amortization. Usually the stress is on the second syllable, but other pronunciation is also found with the stress on the last vowel.
The term originally appeared in the 1980s. It was used to analyze the company's ability to repay its debt obligations. Currently, this indicator is of interest to a wide range of people - from top management to line workers who are interested in the results of the company's activities. Potential investors use EBITDA to assess the investment attractiveness of a company and predict their income from investing in its securities.
Also, EBITDA is used for comparative analysis of competing companies operating in the same industry. On its basis, the solvency of organizations and the likelihood of full and timely repayment of their debt obligations are assessed.
EBITDA is applied when deciding whether to take over a company or grant a loan to it. Using this indicator, it is convenient to analyze the feasibility of changing the owner of the organization and the possibility of reducing the interest rate on bank loans.
The main advantage of EBITDA is the speed and ease of calculating the indicator.
It is important to understand that EBITDA reflects the company's earnings before deducting all mandatory expenses. Therefore, this indicator cannot be used to assess the net financial result of the company and its profitability. EBITDA speaks more about the efficiency of the organization's core business, its ability to generate profit.
This indicator is convenient to use for express analysis of the organization's reporting. None of the accounting standards mentions this term, therefore both the concept of EBITDA and the calculation formula are advisory, not mandatory.
In addition to EBITDA, many companies calculate EBIT (earnings before interest and taxes) - profit before interest and taxes. EBIT differs from EBITDA in the amount of accrued depreciation charges for items of property, plant and equipment and intangible assets.
EBITDA video:
Disadvantages of EBITDA Ratio
Another reason for the popularity of EBITDA is that it excludes depreciation and amortization costs. All organizations are required to depreciate fixed assets in accordance with accounting requirements. The legislation provides for different ways of writing off the initial cost of property to the cost of production. For example, if an organization uses a straight-line method, then the cost will be written off evenly in equal parts.
So, if the company has put a vehicle on the balance sheet at the initial cost of 400 thousand rubles, then when using the linear method of calculating depreciation annually for four years, 100 thousand rubles will be taken into account as part of the company's expenses. But in fact, the company will not bear these costs, which means that its real profit will be greater than the value reflected in the financial statements. Therefore, financiers call depreciation "paper expense": it is reflected only on paper. Therefore, EBITDA can be used to assess the real operating profitability of a company.
But this indicator advantage is rather controversial. For example, the famous American financier and investor Warren Buffett is skeptical about EBITDA. He famously said, "Do managers think the tooth fairy is responsible for capital expenditures?"
Warren Buffett says that the statement of financial results does not reflect investment costs associated with the acquisition of machinery, equipment, transport, buildings and structures. All of these items of property, plant and equipment require significant capital investments and will subsequently be used over a long period of time. It turns out that EBITDA characterizes only the current activities of the company, not taking into account the company's operations in the investment area.
At the same time, any equipment wears out and depreciates over time. Morally and physically obsolete fixed assets require replacement or repair. The company should set aside money in advance for these purposes, otherwise, when there is an urgent need to buy new equipment, and there is no money for it, everything can turn into bankruptcy of the organization.
Thus, excluding depreciation, we forget about the need to create a repair fund or create a reserve for the purchase of new fixed assets.
In world practice, there are many examples of companies that went bankrupt because top managers deliberately or unknowingly exaggerated financial results using EBITDA. Therefore, it is important to understand that the use of this indicator requires separate accounting for depreciation costs.
How EBIT and EBITDA Differs from Operating Profit
People outside of finance and business often confuse operating profit and EBIT / EBITDA. But they are different. EBIT / EBITDA includes income and expenses for all types of the company's activities (core, financial and investment), and operating income includes only income and expenses for core activities.
Non-operating income and expenses (financial and investment activities) are usually periodic and irregular. These include income from one-time transactions, income from changes exchange rates, expenses that cannot be attributed to the main activities of the organization. And income from the sale of fixed assets, reserves for doubtful debts, repaid receivables are included in the operating profit, since they are associated with the main activities of the company.
Operating income is included in another synthetic indicator - OIBDA (operating income before depreciation and amortization - operating income before depreciation of fixed assets and intangible assets). This indicator differs from EBITDA in its composition: it includes only operating profit, excluding non-operating income and expenses.
How important is it to take into account the company's EBITDA
Who should use EBITDA? First, organizations with high volume capital expenditures that write off items of property, plant and equipment over an extended period of time. EBITDA makes their performance indicators more attractive to potential investors. EBITDA masks a significant portion of their expenses.
Nevertheless, many investors use this indicator to assess the investment attractiveness of companies, because EBITDA allows us to assess its development capabilities, reinvestment of funds and repayment of debt obligations. EBITDA helps benchmark peers and determine their position in the industry. The main purpose of such an assessment is to determine the value of the organization using information about the market value of similar companies.
Peer organizations operating in the same market may have different growth rates, differ in size cash flows and potential risks. If these indicators are not corrected, it will be difficult to make comparisons.
EBITDA is well suited for these purposes. Since the interest on loans and taxes paid by the company is not taken to calculate the profit, it can be used to compare companies with different tax regimes and the level of debt burden by the total income received from all types of activities of the organization.
EBITDA is convenient to use for analyzing and forecasting a company's development in the short term. If you need to assess the investment attractiveness and potential of organizations for a longer period, then you should not focus on it, since EBITDA does not take into account the cost of depreciation of assets.
As we have already said, there is no single opinion among financiers about this indicator. So neither the International Financial Reporting Standards (IFRS), nor the US accounting rules (US GAAP) recognize EBITDA.
Experts believe that it should be used as an additional indicator when conducting a fundamental analysis of a company's securities or assessing the results of activities with competitors.
Types of EBITDA indicators
EBITDA margin- EBITDA margin, shows the profitability of the company without taking into account the costs of taxes, depreciation and interest on loans and borrowings. The following formula is used for the calculation:
EBITDA / Sales revenue = EBITDA margin
Debt to EBITDA Ratio characterizes the company's ability to pay off its debt obligations, that is, it shows the level of debt burden. Essentially, EBITDA reflects the total amount of resources a company can use to repay loans and borrowings. According to experts, EBITDA most accurately reflects the real picture of the financial condition of the organization. The debt to EBITDA ratio is used by both investors when assessing the investment attractiveness of a company and managers when making management decisions. The following formula is used for the calculation:
Total Liabilities / EBITDA = Debt to EBITDA Ratio,
where total liabilities are the sum of all long-term and short-term liabilities of the company (data on the amount of debt are contained in the liability of the balance sheet).
Operating profit OIBDA(operating income before depreciation and amortization) is the profit from the main activities of the organization, excluding depreciation costs for fixed assets and intangible assets. The purpose of creating this synthetic indicator is to exclude the influence of non-operating income and expenses on the final financial result of the organization's activities.
The OIBDA ratio is calculated using the formula:
Operating profit + amortization of intangible assets + depreciation of fixed assets = Operating profit OIBDA
The main difference between OIBDA and EBITDA is in different profit indicators that are used in the calculations. Since OIBDA is based on operating profit and not on the net profit of the organization, the OIBDA margin shows the efficiency of the company's core business, not the business as a whole.
EBITDA margin of the company
Let's take a closer look at the EBITDA margin, which was already mentioned earlier. This ratio is the ratio of EBITDA to sales revenue, which is reflected in the calculation formula:
EBITDA margin = EBITDA / Revenue
What is the purpose of this indicator? It characterizes the efficiency of the company without taking into account the impact of the taxation system and the size of debt obligations. Therefore, using EBITDA margin, you can benchmark and compare the performance of companies from the same industry with different capital structures and operating in different countries.
According to experts, with an EBITDA margin of more than 12%, the company operates quite efficiently. If the value of the coefficient is less than or even close to zero, then it means that the management of the organization needs to take urgent measures to prevent bankruptcy and get out of the crisis.
How to calculate EBITDA
To calculate EBITDA, data from Form No. 1 ( balance sheet) and Form No. 2 (statement of financial results). The main information is contained in the statement of financial results, from the balance sheet you only need the values of the accrued depreciation for fixed assets and intangible assets. There are two options for calculating the EBITDA ratio.
In the first, original version, data from IFRS and GAAP statements are used. The calculation formula is as follows:
Net income + Income tax expense - Reimbursed income tax + Extraordinary expenses - Extraordinary income + Interest paid - Interest received + Depreciation charge on tangible and intangible assets - Assets revaluation = EBITDA
The second option is adapted to Russian accounting standards. The formula looks like this:
Profit from sales + Depreciation charge = EBITDA
All data required for the calculation are contained on page 50 of Form No. 2 and Form No. 5.
It should be understood that the EBITDA value obtained according to the adapted formula will differ from the calculations in the original way. Errors are possible due to incomplete correspondence of the data used for the calculation in the first and second options.
To calculate the EBITDA indicator for the balance sheet, the following formula is used:
Profit (loss) from sales + interest payable + Depreciation charge = EBITDA
Bringing EBITDA to a single denominator
Financiers actively use EBIT and EBITDA to analyze the financial condition of companies and assess the value of a business. In the reporting of many firms, compiled in accordance with the requirements of international financial reporting standards, you can find these so-called non-GAAP indicators.
At the same time, there is no single calculation methodology, and in different companies these indicators are calculated in different ways. As a result, they are difficult to use to compare the performance of organizations operating in the same industry. It turns out that the main advantage of EBITDA is offset by the use of different calculation methods. Also due to the fact that in financial practice there is no single standard for the formation and presentation of non-GAAP indicators in official reporting, companies have more opportunities to embellish them to increase investment attractiveness in the eyes of investors.
In the early 2000s. many companies actively used EBIT and EBITDA in their reporting to attract the attention of potential investors. The state regulator could not fail to notice this. Initially, US GAAP reporting was used to calculate EBIT and EBITDA, and the calculation rules were regulated by the US Securities and Exchange Commission (US SEC). In accordance with the requirements of the US SEC, EBIT and EBITDA are calculated according to the original formula, the data for the calculation are taken from the statements generated in accordance with GAAP standards. The totals do not include taxes, interest and depreciation. It is prohibited to exclude other types of expenses from the calculation of indicators.
If a company calculates profit in any other way, then it cannot call it EBIT and EBITDA. Therefore, in this case, the prefix "adjusted" is added to the name of the indicator. For example: "Adjusted EBIT", "Adjusted EBITDA", "Adjusted OIBDA", etc.
Adjusted EBITDA is usually further cleared from the following items:
- expenses and income not related to the main activity of the organization (previously they were called extraordinary and non-operational). This is possible provided that there are relevant items in the reporting or they can be isolated from the total indicators in some way;
- exchange rate differences associated with the dynamics of exchange rates;
- loss from the sale or disposal of current and non-current assets;
- losses from a decrease in the value of various groups of assets, including the reputation of an enterprise;
- stock-based compensation;
- financial result from owning and managing interests in associates and joint ventures and operations;
- creation of reserves for various purposes (for vacations, for major repairs, for doubtful debts, etc.).
Example 1. As an example of calculating EBITDA, consider the statements of the Gazprom Neft group of companies for 2014, drawn up in accordance with the requirements of IFRS.
Note 39 to the Annual Report “Segment Information” on page 55 discloses the concept of “Adjusted EBITDA by segment”. The calculation of the adjusted indicator does not include tax liabilities, interest expenses, depreciation charges, exchange rate differences and other costs not related to the main activities of the company. In addition to the value obtained, Gazprom's share in the profits of associates and joint ventures is added.
See page 57 for an explanation of how Adjusted EBITDA is calculated across the Gazprom Neft group of companies. So, in the calculation of the indicator, in addition to traditional items of expenses, "Other expenses" and "Loss from exchange rate differences" are included, which refer to non-operating expenses. And at the end, the final indicator is adjusted taking into account the results of the work of associates and joint ventures:
Thus, it can be seen that the deviation of the EBITDA value calculated the traditional way, from the adapted version is about 30%. Such a gap in the two indicators is due to the fact that the adjusted EBITDA additionally takes into account exchange rate differences and the organization's shares in associates.
Example 2. Let us consider the features of calculating EBITDA using the example of X5 Retail Group, which generates reports in accordance with the requirements of international financial reporting standards (IFRS). To ensure comparability, data are also presented for 2014.
The company's official annual reporting uses adjusted EBITDA ("adjusted EBITDA"), which, in addition to depreciation, taxes and interest on loans and borrowings, does not also include impairment losses, exchange rate differences (net foreign exchange result), and share of loss of associates.
Thus, the adjusted EBITDA according to the reporting data for 2014 is less than that calculated in the traditional way by 6%. The main reason for this deviation is the accounting for impairment of non-current assets in the adapted version of EBITDA. In 2013, both indicators were practically at the same level, since the impact of asset impairment was insignificant.
Calculation of EBITDA on the example of Rosneft
In order to calculate EBITDA, we need to take the value of profit before tax from the income statement, and from the cash flow statement - depreciation and amortization, interest received and paid for the reporting period. The information must be taken from statements compiled according to IFRS rules, not RAS. The calculation formula will be as follows:
EBITDA = Profit before tax + Depreciation and amortization + Interest paid - Interest received
For clarity, let's calculate the EBITDA value based on Rosneft's 2016 financial statements. In the annual income statement, drawn up in accordance with the requirements of international financial reporting standards, we find the value of profit before tax. In 2016, it amounted to 317 billion rubles:
We will find the rest of the indicators in the cash flow statement. It consists of three sections: cash flows from the operating, financial and investment activities of the organization. In the first section, we take the value of the indicator for the depreciation and amortization of assets and the resulting interest. In 2016, they amounted to 482 billion rubles and 58 billion rubles, respectively.
Rosneft cash flow statement for 2016:
From the section on financial activities we take the value of the indicator for the interest paid. In 2016, it amounted to 143 billion rubles:
We substitute the found values into the formula and calculate the EBITDA of Rosneft for 2016:
EBITDA = 317 + 482 + 143 - 58 = 884 billion
Features of calculating EBIT and EBITDA according to IFRS reporting
- Impairment loss.
An impairment loss on the company's assets is recognized in accordance with the requirements of IAS 36, IAS 2 and IAS 39.
The original formula does not include impairment loss in EBITDA. But it is often possible to find adjusted variants of the indicator, cleared of such “non-cash expenses”. Most often, losses from impairment of goodwill and other intangible non-current assets of the company are removed from EBITDA in the calculation. This is due to the fact that losses are one-time in nature and are not related to the main activities of the organization. Another argument in favor of ignoring this expense item is that impairment is similar in meaning to the depreciation of fixed assets and intangible assets, so it should also be excluded from EBITDA.
- Interest income.
In the formula for calculating EBIT and EBITDA there is such an element as “interest or finance expense”. It means the total result of received and paid interest income and expenses (net interest expense). For this reason, interest income must be taken into account when calculating EBIT and EBITDA (that is, the amount of interest income for the reporting period should be deducted from the total).
- Interest resulting from associates and joint ventures and operations.
Investments in associates and joint ventures and transactions are reflected in accordance with the requirements of IAS 28 and IFRS 11.
When calculating EBIT and EBITDA in the traditional way, the share resulting from associates and joint ventures and operations is not considered. Adjusted figures are often cleared from this item of income or expense (depending on what financial result from the investment the organization received - profit or loss). Thus, in the example of calculating EBITDA based on the reporting data of the Gazprom Neft group of companies, the final indicator was adjusted taking into account the specifics of participation as a result of associates and joint ventures and operations.
- Extraordinary income and expenses.
In some sources, you can find the point of view that the composition of EBIT and EBITDA should not take into account the extraordinary income and expenses of the organization.
Nevertheless, in official standards, in particular in IAS 1, it is said that certain items of expenses or income should not be classified as extraordinary. It turns out that in the reporting, formed according to international standards, it is impossible to directly see the amount of profit or loss that is not related to the company's operating activities and is of a one-time, extraordinary nature.
In addition, according to the requirements of the classical SEC methodology, it is prohibited to deduct from EBIT and EBITDA any items other than those specified in the original formula (taxes, interest and depreciation). At the same time, the net profit calculated according to US GAAP standards (net income) includes non-operating expenses and income. Therefore, when calculating EBIT and EBITDA according to IFRS reporting, there is no need to separately highlight the amount of extraordinary income and expenses.
- Profit / loss from the sale of fixed assets and intangible assets.
When calculating EBIT and EBITDA in the traditional way, profit or loss from the sale of fixed assets is taken into account when determining the amount of net profit and is not deducted from the total. If the company rarely sells fixed assets and intangible assets and such income or expense is one-off for it, and the financial result from the sale is significant, then this item can be removed from Adjusted EBIT and EBITDA.
- Stock-based compensation (compensation to employees and directors in equity instruments).
The payment of remuneration to shareholders is carried out in accordance with the requirements of IAS 19 and IFRS 2. Thus, the international financial reporting standards state that if goods or services received or purchased in a transaction involving payment based on shares are not meet the criteria for recognition as assets, they must be recognized as an expense.
When calculating EBIT and EBITDA in the classical way, these costs are not taken into account. Adjusted figures often include a deduction for these “non-monetary” items.
- Income tax.
Income tax is reflected in the financial statements in accordance with the requirements of IAS 12. This takes into account not only the amount of current tax liabilities but also expenses or income for deferred income tax. When calculating EBIT and EBITDA, you need to take into account all receipts or payments associated with this tax.
In some cases, companies adjust their income tax figure to calculate EBIT and EBITDA by adjusting taxable income for expenses and income, which are taken into account in the calculation of totals.
It should be borne in mind that, according to international financial reporting standards, the amounts withheld tax payments for income tax on the amount of dividends paid by the organization are not reflected in the income tax, but are included in the amount of dividends, therefore they are not included in net profit and are not included in EBIT and EBITDA.
- Other comprehensive income.
International Financial Reporting Standards separately describe in detail the rules for accounting for the financial result of a company, including other comprehensive income.
When calculating EBIT and EBITDA, data is taken that is contained in the section (or statement) of profit or loss. However, data on the basis of which other comprehensive income is calculated is usually not included in the calculation of EBIT and EBITDA. These can be items such as income or expense from the revaluation of non-current assets, the effective share of gains and losses from hedging instruments in cash flow hedges, exchange rate and translation differences, share in other comprehensive income of associates and joint ventures, expenses and income from deferred taxes, related to components of other comprehensive income, etc.
- Presentation of EBIT and EBITDA in IFRS reporting.
Usually informal indicators calculated not in accordance with the requirements financial standards, and at the request of the company and investors, are published in separate reports, releases and presentations. Nevertheless, EBIT and EBITDA indicators can often be found in the official statements of the organization. Many companies publish them both in the statement of comprehensive income and in the notes. In addition, even international financial reporting standards do not have direct requirements for the mandatory disclosure of formulas for calculating optional indicators. But to ensure greater transparency of reporting for internal and external users, experts recommend that companies still disclose this information.
In modern Russian business, more and more foreign words and abbreviations have begun to be borrowed, which no one heard about 25 years ago. Now these terms are found everywhere. Today we will analyze two quite popular ones: OIBDA and EBITDA. Both terms refer to the financial analytical performance of a company and reflect the ability to respond according to its performance.
What is EBITDA.
EBITDA (Earnings Before Interest, tax, depreciation and Amortization) in Russian, the word is pronounced as EBITDA in translation means "profit before interest, taxes and depreciation." In essence, this means that EBITDA is gross profit before deducting accrued interest, dividends, before taxes and before deducting depreciation from it on fixed assets and intangible assets. First of all, EBITDA shows the company's profit, excluding non-monetary items of expenses, that is, based on the EBITDA indicator, one can assess the company's investment attractiveness, profitability and self-financing reserves.
What is OIBDA.
OIBDA (Operating Income Before Depreciation And Amortization) translated from English “ operating income before deduction of depreciation of fixed assets and depreciation. " OIBDA is a company's financial measure of operating income before depreciation and amortization. OIBDA serves for a more accurate assessment of the company's solvency, since it does not include irregular income and expenses.
Differences between OIBDA and EBITDA.
The main difference between OIBDA and EBITDA is that OIBDA is more stable and difficult to adjust in the short term. This means that, when assessing the risks of capital investment, OIBDA will more accurately reflect the situation in the company for the future. Since, unlike EBITDA, OIBDA calculations use not net profit, but operating profit (profit from transactions that are of a regular nature).
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