Tax & admin · 15 February 2018

What is EBITDA and why is it important?

EBITDA has been criticised as a measure of company performance
You may have found the acronym on a company income statement, but what is EBITDA? Business Advice expert Rob Drury explains what it stands for and what value it could give to your business.

What is EBITDA?

First things first, what does EBITDA actually stand for? The answer is Earnings before Interest, Tax, Depreciation and Amortization. Let’s break this down into a few different pieces.

What do we mean byearnings, interest andtax?

All found on the business? income statement, these are the most’straightforward of the factorsthat are included when considering what is EBITDA. They cover the profit you’ve made, the interest you’ve paid on any loans or forms of credit that you might have, and the taxes you’ve paid.

What do we mean bydepreciation?

Now were getting into more technical accountancy language, with depreciation covering the drop-in value that has happened to any tangible, physical assets that you own as a business owner.

For example, if you had a large piece of machinery which cost 10, 000 when you bought it, at the end of year one it will be worth a bit less, year two a bit less, year three even less, and so on. The rate of this reduction is the level of depreciation that youll beincluding in any EBITDA calculation.

What do we mean byamortisation?

The final element is amortisation, which is similar to depreciationexcept it covers intangible assets, such as copyrights or patents.

For example, if you own a copyright and this will last for twenty years and is worth 100, 000 on day one, then each year over the course of the copyright it becomes less valuable and its value is amortised as its worth reduces.
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What does it all mean when taken together?

The most straightforward calculation of EBITDA is:

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization


 
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ABOUT THE EXPERT

Former footballer and cinema manager Robert Drury has been a digital professional since 2000, specialising in project management, client services, and product management. He supported global brands such as Kraft Foods, Peugeot Citroen, and Lloyds Banking Group with their online presence before moving into startups. He was a founding team member at Ormsby Street, a small business financial information tool, before moving to Qudini to oversee the development of that firm's customer experience software product.

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