What is EBITA?

Earnings before interest, taxes, and amortization (EBITA) is a financial metric used to determine a company’s value. It shows how much a business earns from core operations before accounting for financing costs, taxes, and the gradual write-off of intangible assets.

Investors often use EBITA to compare profitability across companies within the same industry. In this blog post, we’ll explain what EBITA is, how it differs from other financial metrics, and how you can calculate a company's EBITA using data from financial statements.

Understanding EBITA

EBITA definition

EBITA stands for Earnings Before Interest, Taxes, and Amortization (EBITA). It’s a non-GAAP financial metric used to evaluate a company’s operating income or profitability by removing the effects of debt financing (interest), tax obligations, and amortization (writing off the cost of intangible assets over time).

EBITA is calculated as:

Net Income + Interest + Taxes + Amortization = EBITA

The information needed to calculate EBITA can be found in a company’s financial statements and reports.

Components included in EBITA

EBITA takes a company’s net income and adds back:

• Interest: The cost of borrowing money
• Taxes: Corporate income taxes paid
• Amortization: Spreading the cost of intangible assets over time.

Importance of EBITA in financial analysis

EBITA is an important tool in financial analysis because it measures a company’s operational performance and highlights its true earnings power. This can be especially useful when comparing businesses with different tax strategies or capital structures.

When we talk about operational performance, we’re referring to how well a company runs its core business activities – things like producing goods, delivering services, managing costs, and generating revenue. It’s all about the efficiency and effectiveness of a company’s day-to-day operations, without the influence of things like debt or taxes. Because EBITA shows operational performance, it helps investors understand how strong a business is at its core, before any financial or accounting strategies come into play.

That said, because EBITA doesn’t account for these key expenses, it can be misleading to rely on it exclusively. To get a more complete picture of a company’s profitability, EBITA should be used alongside other metrics when conducting financial analysis.

Differences between EBITA and other financial metrics

Here’s how EBITA differs from other financial metrics like EBIT and EBITDA:

• EBIT (Earnings Before Interest and Taxes): Similar to EBITA but includes amortization
• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Similar to EBITA but excludes depreciation.
• Net Income: The bottom-line profit after accounting for all expenses, interest, taxes, and amortization.

EBITA vs. EBITDA

The main difference between EBITA and EBITDA is that EBITDA excludes depreciation.

Depreciation accounts for the wear and tear on a company’s physical assets, such as machinery or buildings. This cost is excluded in EBITDA because it’s a non-cash expense. For that reason, EBITDA is more commonly used than EBITA, especially for asset-heavy industries like manufacturing or utilities, where depreciation significantly affects reported earnings.

Here’s an example that shows how EBIT and EBITDA can provide different pictures of a company’s financial performance:

Consider a company with $1 million in net income, $200,000 in depreciation, and $100,000 in amortization. Their EBITDA would be $1.3 million while EBITA would be $1.1 million. This difference shows how depreciation can inflate or reduce profitability depending on the metric used.

EBITA vs. GAAP earnings

Generally Accepted Accounting Principles (GAAP) earnings are a common set of standards used to maintain consistency and transparency in financial reporting. All publicly traded companies in the U.S. are required to report GAAP earnings, which include all revenues and expenses, including interest, taxes, depreciation, amortization, and one-time items like restructuring charges or asset write-downs.

Because it excludes interest, taxes, and amortization, EBITA is considered a non-GAAP metric.

The main benefit of using EBITA over GAAP earnings is that it helps investors and analysts focus on a company’s operating profitability, especially when comparing competitors in the same industry. For example, two companies might report similar GAAP earnings but one may have slightly higher interest costs or amortization charges. EBITA strips these out so it’s easier to compare performance on a like-for-like basis.

That said, since EBITA doesn’t follow standardised accounting rules it can vary depending on how a company chooses to define or calculate it. That’s why it’s often used alongside, rather than instead of, GAAP figures.

Where can you find a company’s EBITA?

Since EBITA is a non-GAAP metric, it’s not always listed in a company’s financial statements. However, you can calculate it using information found in the income statement and cash flow statement.

Start by looking for operating profit (also called EBIT) on the income statement. From there, add back amortization, which is often found in the notes to the financial statements or under non-cash expenses in the cash flow statement.

If a company does report EBITA directly, you’ll often find it in the management discussion section or in supplemental earnings materials. Keep in mind that because companies define and calculate non-GAAP figures differently, it’s important to review how EBITA was derived before you start using it for financial analysis.

How to calculate EBITA

EBITA formula

There are two main ways to calculate EBITA.

1. EBITA = EBIT + Amortization

Where:

• EBIT (Earnings Before Interest and Taxes): This is a company’s operating profit, calculated as EBIT = Revenue - Cost of Goods Sold (COGS) - Operating Expenses.
• Amortization expenses: Non-cash expenses that spread out the cost of intangible assets over their useful life. It’s often included within operating expenses on the income statement, but you can usually find the exact figure on the cash flow statement or in the notes of a company’s 10-K or 10-Q.

2. EBITA = Net Income + Interest + Taxes + Amortization. This version starts from net profit and adds back excluded costs.

Example EBITA calculation

Below is an example EBITA calculation using the formula EBITA = EBIT + Amortization:

Let’s say a company reports $1,000,000 in revenue, $400,000 COGS, and $300,000 in operating expenses (including $50,000 of amortization).

The first step is to calculate EBIT:

$1,000,000 - $400,000 - $300,000 = $300,000

Then we add back amortization:

EBITA = $300,000 + $50,000 = $350,000.

Step-by-step EBITA calculation

Let’s walk through a step-by-step example of calculating EBITA using fictional figures for a manufacturing company.

Step 1: Operating assumptions

In 2022, Company X generated $300 million in revenue. Their COGS was $120 million and total operating expenses came to $140 million. Within those operating expenses, depreciation was $25 million and amortization was $15 million. That leaves $100 million in SG&A expenses (excluding depreciation and amortization).

Operating assumptions:

• Revenue: $300 million
• COGS: $120 million
• Operating expenses: $140 million
  • Depreciation: $25 million
  • Amortization: $15 million
• D&A total: $40 million
• SG&A (excluding D&A): $100 million

These assumptions will feed directly into our income statement and margin calculations in the next step.

Step 2: Income statement build (non-GAAP)

Here’s how Company X’s simplified income statement looks like:

This version shows operating earnings before and after removing non-cash expenses.

Step 3: EBITDA margin vs. operating profit margin calculation

Now, let’s calculate the two margins based on our income statement:

• EBITDA margin: $80M / $300M = 26.7%
• Operating margin (EBIT margin): $40M / $300M = 13.3%

As you can see, including depreciation and amortization lowers the profit margin.

Step 4: EBITA calculation and margin analysis

Finally, we can calculate EBITA by adding amortization back to EBIT:

• EBITA: $40M + $15M = $55M
• EBITA margin: $55M / $300M = 18.3%

Significance of EBITA

One of the main advantages of using EBITA is that it focuses on the profitability of a company’s operations rather than its tax strategy or financing costs. This makes it easier to compare companies in the same industry, especially when they have different capital structures or tax obligations.

Generally, a positive EBITA suggests a company is generating enough from its main business to fund growth, cover debt, or return value to shareholders. On the other hand, an unsatisfactory EBITA might mean a company is struggling to control its cash flow or turn a profit.

Lenders sometimes use EBITA when assessing a company’s ability to meet its financial obligations. In this situation, EBITA can offer a cleaner picture of a business’s earnings power, especially when net income is affected by one-off items or accounting rules.

EBITA does have limitations, however. Because it’s a non-GAAP metric, there’s no standard way of calculating it and companies aren’t required to report it. EBITA also excludes important costs, so it should only be used as part of a broader financial analysis that includes net income, cash flow, and other key metrics.

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