What Is EBITA?

What Is EBITA?

Let me explain EBITA to you directly: Earnings before interest, taxes, and amortization (EBITA) is a measure of a company's profitability and value. As the name suggests, EBITA adds interest, taxes, and amortization back into the earnings equation. It's not prepared using generally accepted accounting principles (GAAP). You can use it as a decision-making tool to compare companies within the same industry. The data for compiling a company's EBITA comes from its financial statements. It's similar to earnings before interest, taxes, depreciation, and amortization (EBITDA).

Understanding EBITA

A company's earnings generally refer to the profits or net income it generates after accounting for taxes and expenses. These are reported by public companies on a quarterly and annual basis. But there are other profitability metrics that include expenses, and earnings before interest, taxes, and amortization is one of them.

As I noted, this metric adds interest owed on debt, taxes owed, and the effects of amortization back to a company's earnings. You calculate EBITA by taking financial data from the company's financial statements.

Some analysts and investors consider a company’s EBITA to be a more accurate representation of its actual earnings. This is because it removes the interest on company debt, the taxes owed, and the effects of amortization—the accounting practice of writing off the cost of an intangible asset over years—from the equation.

How to Calculate EBITA

To calculate a company’s EBITA, you must first determine the company’s earnings before tax (EBT). This figure appears in the company’s income statements and other investor relations materials, and you add any interest and amortization costs. So the formula is: EBITA = EBT + Interest Expense + Amortization Expense.

Here's a fast fact: EBITA is also viewed by some as an indicator of the efficiency of a company’s operations.

EBITA vs. EBITDA

EBITA is not used as commonly as EBITDA, which adds depreciation to the calculation. Depreciation records the reduced value of the company’s tangible assets over time. It accounts for the wear and tear on assets like equipment and facilities. Some companies, such as those in the utilities, manufacturing, and telecommunications industries, spend a significant amount of cash on equipment and infrastructure, which are reflected in their books.

Both EBITA and EBITDA are used by some analysts to gauge a company’s operating profitability. Profitability is earnings generated throughout the ordinary course of doing business. The company’s profitability may be more apparent if capital expenditures (CapEx) and financing costs are subtracted from the official earnings total.

Some industries require significant investments in fixed assets. Using EBITDA to evaluate companies in asset-heavy industries may provide a clearer view of operating profitability by excluding the impact of depreciation, whereas EBITA might distort a company’s profitability metrics. As such, EBITA may be used instead of EBITDA for companies without substantial CapEx that may skew the numbers.

Keep in mind that you should be careful with EBITA and EBITDA when making investment decisions. That's because non-GAAP metrics are not standardized and can sometimes be misleading. They commonly overstate a business's cash flow.

EBITA vs. GAAP Earnings

Generally accepted accounting principles (GAAP) earnings are a common set of standards accepted and used by companies and their accounting departments. The use of GAAP earnings standardizes the financial reporting of publicly traded companies in the United States.

Many companies report GAAP earnings as well as non-GAAP earnings, which exclude one-time transactions. The rationale for reporting non-GAAP earnings is that substantial one-off costs, such as organizational restructuring, can distort the true picture of a company’s financial performance. Therefore, some do not consider them normal operational costs. Earnings before interest and taxes (EBIT), EBITA, and EBITDA are examples of commonly used non-GAAP financial measures.

What Is the Difference Between EBITA and EBITDA?

Each of these is a measure of profitability used by analysts: earnings before interest, taxes, and amortization, and earnings before interest, taxes, depreciation, and amortization. Both are used to gauge a company’s profitability, efficiency, or value. EBITDA is the more commonly used measure because it adds depreciation—the accounting practice of recording the reduced value of a company’s tangible assets over time—to the list of factors.

Where Can You Find a Company’s EBITA?

If a company doesn’t provide this metric (there’s no legal requirement to do so), you find it by looking at the firm’s financial statements. Look for the earnings, tax, and interest figures on the income statement; the amortization is usually found in the notes to operating profit or on the cash flow statement. A shortcut to calculating EBITA is to start with operating profit, also called earnings before interest and taxes, then add back amortization.

How Is EBITA Useful?

EBITA is considered by some to be a reliable indicator of how efficient a company’s operations are. Some analysts use it to gauge profitability, although doing so can be misleading because of the excluded expenses.

The Bottom Line

EBITA is one way that analysts measure a company's efficiency, profitability, and value. While it can be a useful tool, it isn't always an accurate reflection of a business's financial situation. Most companies use EBITDA, which is a more accurate financial picture, but it also has the same limitations in that it hides true profitability by excluding these expenses.