The difference between operating profit and ebitda. Profit EBITDA

Ebitda is an economic indicator of earnings before taxes, depreciation and amortization and interest paid on borrowed funds.

 

Ebitda is a measure of a company's financial performance based on earnings before interest, depreciation and amortization, and taxes. It provides a rough estimate of cash flow and can be used to determine a company's commercial performance and compare two firms from the same business sector. Its calculation is not affected by the capital structure, and therefore it is often used to determine the value of a business. Investors use it to evaluate the potential return on an investment.

Story

The described absolute indicator came into the domestic economy from world reporting standards, where it was used to evaluate the performance of a company’s financial activities and compare it with similar enterprises.

It appeared in the mid-80s. In those days, financed buyout transactions (purchasing a controlling stake in an enterprise on credit) were actively concluded. Historically, EBITDA is a reflection of a company's ability to service debt. Its use, coupled with the amount of net profit, made it possible to quickly determine what percentage of payments the company could provide in the short term.

Interesting: The prerequisite for the emergence of the indicator was the “fever” of the 1980s. At that time, takeovers and leveraged buyouts became extremely popular, and companies were paying unreasonable prices for assets. Therefore, there is an urgent need to measure the profitability of generated enterprises.

The main users were investors who viewed the enterprise as a collection of assets with the possibility of selling them separately. The calculated value served to determine the amount that can be used to repay loans.

Features of use

Today, EBITDA calculations are carried out by companies in all industries. The purpose of this action is the initial assessment of the profitability of operating activities. However, the calculated data does not measure net profit and liquidity; it does not appear in the financial statements and does not reflect the profitability of the company itself.

What is Ebitda in simple terms? An intermediate result of a commercial activity that reflects its efficiency, as if it had no investments, debt or tax burdens. But evaluating operating results does not say anything about the effectiveness of business activities.

Important: The world's largest investor Warren Buffett became one of the first critics of the use of the indicator. In 2002, in Berkshire Hathaway's annual report, he wrote about the most important disadvantage: “Companies can spend billions of dollars on investments and equipment purchases, which will not affect the results of calculations.”

Why is this parameter used by analysts, managers, financiers and executives? Thus, there is an operating profit indicator in which expenses subtracted from revenue include depreciation and amortization (EBIT). The difference between EBITDA and gross profit is the non-deduction of interest, depreciation, dividends and taxes. And EBIT is gross profit excluding income and expenses from other operations.

In Russian practice, for calculation, the amount of refunded income tax should be subtracted from the totality of net profit and tax profit expenses. Then add extraordinary expenses to the value and subtract extraordinary income. Then add the interest paid and subtract the interest received.

What is the difference between EBITDA and EBIT? The calculation of the latter is interesting for banking structures. A positive value reflects the ability to attract and service loans. But it is not a guarantor of the final profit: in the presence of an impressive debt burden, the likelihood of losses is high. An important difference between EBITDA is that it takes into account the financial result of depreciation, which brings it as close as possible to the indicators of the real cash flows of the enterprise. This is why investors use it more often than EBIT.

Calculation formula

The necessary calculations can only be made on the basis of undistorted financial statements prepared in accordance with IFRS standards. Lukoil, Gazprom Neft, Bashneft - over half of the largest Russian companies apply this international standard. The original formula using GAAP and IFRS indicators looks like this:

EBITDA = Net profit + Income taxes - Income tax refund + Extraordinary expenses - Extraordinary earnings + Interest paid - Interest received + Depreciation - Revaluation of assets

Adapted to domestic reporting standards, it looks different:

EBITDA = Profit from sales + Depreciation and amortization

This formula produces results with an error, and its application requires data from Form no5 (“Appendix to the Balance Sheet”). The calculation can also be made using the following Forms F-2 (“Profit and Loss Statement”), taking into account the amount of the cost of intellectual and industrial property, fixed assets (not included in the designated document).

However, what exactly is Ebitda? This is the amount of income received from the company's main business activities. This means that it can be calculated using a simplified formula.

It is often used in credit analysis by bank risk managers and investors for an interim assessment of the company's performance. The ambiguity of the coefficient is that there are at least 5 ways to calculate it and they are all radically different. Therefore, when publishing EBITDA on their website, companies indicate the calculation principle. I would recommend taking the numbers into account, but also comparing data from other open sources (a big difference in the numbers is cause for concern). And calculate the coefficient yourself. What is EBITDA and how to calculate the ratio, read on.

What is EBIT and EBITDA

EBITDA reflects the company's performance before depreciation and payments on debt obligations to creditors and the state. EBIT is EBITDA plus depreciation. Initially, the EBITDA multiplier was calculated to analyze the feasibility of a corporate merger. Later, the indicator began to be used for the overall efficiency of the company and its ability to pay off debts. A negative multiplier value indicates that the company is suffering losses even before depreciation and credit deductions.

The difficulty of calculating the indicator is that there is no uniform approach either in the international standards GAAP, IFRS, or even more so in the Russian RAS (where there is no depreciation as such). The simplest formula for calculating EBITDA is the sum of operating profit and depreciation, but this is more for those who want to get the big picture. It does not take into account many factors of accounting standards, which is why this formula is not used in official calculations.

Formulas for calculating EBITDA

One of the most popular calculation formulas, which is often used when calculating EBIT according to RAS standards, since they do not include depreciation. The data for calculation is taken not from the balance sheet, but from the “Profit and Loss Statement”. Please note that in the report, interest on liabilities has a negative value, that is, in fact they are deducted.

It is considered a direct method of calculation, but there is no precise understanding of what is included in the “Total Costs”, which is why errors in the calculation arise.

The most accurate EBITDA formula, which almost completely satisfies both international and Russian standards in its essence. The only thing left to do is to determine which reports and lines to take the necessary numbers from.

Yes, with the calculation of formulas everything is quite complicated. If we take one of the formulas as a basis and try to calculate EBITDA for different companies, then for some companies the result will agree with what is officially indicated on the website, for others it will not. I recommend, in addition to the multiplier value itself, opening official reports from the company’s website and looking at the release, which compares EBITDA of different periods as a percentage and indicates the reason that influenced the growth or decrease.

A practical example of calculating the EBITDA parameter

As an example, I will take the financial statements of MMK (Magnitogorsk Iron and Steel Works). Judging by official data, EBITDA for the 12 months of 2016 amounted to $1,956 billion. USA, after which the figure was adjusted to 1641 billion due to the sale of a stake in Fortescue Metals Group. In rubles, before the adjustment, the figure was 117,360 billion rubles, after adjustment - 98,460 billion rubles (a slightly rounded rate of 60 rubles/1 US dollar was taken).

It was not possible to calculate EBITDA using the main 4 formulas. There is no division of reporting into forms on the site. And there is too much discrepancy in the interpretation of reporting lines. But there is data for calculation using a simple formula: operating profit amounted to 1462 billion dollars. USA, depreciation - 463 billion. EBITDA = 1462 + 463 = 1925 billion. Difference with the reporting figure - 31 billion dollars. USA.

Advantages and Disadvantages of EBITDA

Advantage EBITDA The point is that the calculation formula excludes some of the indicators that have a great impact on profit:

volume of debt (the formula takes into account the payment of interest on obligations);

taxation (income tax is not taken into account).

The coefficient allows you to compare the performance of companies regardless of their depreciation policy and asset revaluation policy. The only thing that matters is the industry and the amount of operating profit. For example, if one company decided to purchase fixed assets for an amount equal to half of the annual profit and decides to write them off in one year, and the second extends depreciation using the straight-line method over several years, then the final profit indicators of the companies will be radically different. Although the entire amount of profit remains at the disposal of the companies.

But this is also the disadvantage of the indicator - you can compare companies only from one industry, and even then with great caution. Some analysts directly say that EBITDA violates the principles of IFRS and GAAP standards, because no matter what the company's profit, capital expenditures will still take place. And even if the company has not shown a profit, depreciation deductions still need to be made. Below is a striking example of the imperfection of the coefficient:

With the same revenue, all three companies have the same EBITDA value, but the second company declared a loss of 40 thousand and showed negative profitability. This is an example of how EBITDA should be considered only in conjunction with depreciation and tax burden.

Conclusion

EBIT and EBITDA— ambiguous multipliers, which, although officially published on company websites, still do not reflect the complete picture. At the time of EBITDA analysis, information is lost about how much investment the company needs in updating funds. You cannot talk about the efficiency of a company just because the EBITDA of one company is higher than the other. But you shouldn’t completely ignore multipliers. It will be interesting to hear the opinion of blog readers about these multipliers. Please share comments about whether you think EBITDA is a useful ratio.

If you do not want to calculate EBITDA yourself, you can use the paid service “Conomy” or smart-lab.ru/q/shares_fundamental.

Financial indicator EBITDA(Earnings Before Interest, Taxes, Depreciation and Amortization) - used to determine the organization's ability to meet its obligations. Also, financial analysts use EBITDA calculation to determine the value of a business.

This financial term stands for Earnings Before Interest, Dividend, Tax and Depreciation, which means the following: gross profit before deduction of accrued interest, dividends, before taxes and before deduction of depreciation on fixed assets and intangible assets.

EBITDA must be calculated on the basis of high-quality and undistorted accounting data. Such data can be obtained from financial statements prepared in accordance with IFRS, since international standards almost always reflect the vision of the owners and management of the company on what is happening within it (the principle of priority of economic content over legal form is used when reflecting a particular transaction). In addition, IFRS are the most developed and modern financial accounting standards, the creation of which involved the efforts of specialists from almost all economically developed countries of the world. Therefore, for accuracy and credibility, experts recommend calculating EBITDA based on reporting that complies with IFRS.

This ratio serves to evaluate the company's operating results and is close to operating cash flow, since the indicator is cleared of non-cash cost items (depreciation). We can say that the EBITDA calculation illustrates the company's income, the money that the company earned in the reporting period and will be able to spend it in the future. This makes it possible to use this indicator to assess return on investment and self-financing reserve.

In global and Russian practice of assessing the performance of an enterprise, many different indicators are used. One of them is EBITDA. It is an acronym used by global companies to denote a specific type of profit. What is EBITDA needs to be considered in more detail. This will allow for an adequate assessment of the company's performance indicators. By correlating the results of the analysis, carried out according to a generally accepted methodology, it is possible to compare them with other similar enterprises not only in our country, but also abroad.

General concept

To answer the question of what EBITDA is, it is necessary to first say that it is an absolute value. This is an abbreviated name for the first letters of such an indicator as Earnings before Interest, Taxes, Depreciation and Amortization. This concept is translated from English as “profit before taxes, interest on loans, excluding depreciation.”

This is one of the types of profit of any enterprise. It falls between gross and book income. This value is not included in domestic accounting standards. Its use would introduce certain contradictions and distortions into the current regulatory framework.

Initially, EBITDA calculation was necessary in determining the feasibility of acquisitions and mergers. This absolute indicator, together with net profit, can be used to compare the activities of several companies in the same industry.

The meaning of the indicator

The previously presented indicator was necessary to assess the company's ability to service its debt. Based on it, conclusions were drawn about how much a particular company could pay in the planning period.

Previously, EBITDA was of more interest to those investors who viewed the enterprise not as a long-term investment opportunity, but as a collection of assets. This property, from their point of view, would be profitable to sell separately in the future. In this case, it was the indicator under consideration that characterized the amount that would have to be used to pay off loans.

In the 80s of the last century, the scheme under which a company was bought out using borrowed sources of financing was quite common. Today, the indicator of such profit is used by most global companies to assess the possibility of investment and self-financing.

Calculation of the indicator

To understand the essence of the considered system for assessing the financial condition of a company, it is necessary to understand the principle of determining the indicator. Calculating EBITDA involves initially finding the amount of net profit for the reporting period (EBIT). It is located like this:

EBIT = Net profit/loss – Interest income/Expense – Taxation of profits.

Based on the data in Form No. 2 of the financial statements, this formula can be presented as follows:

EBIT = c. 2400 – p. 2300 – (p. 2410 + p. 2421 + p. 2450).

EBITDA = EBIT – Depreciation and amortization.

Depreciation charges for intangible assets and fixed assets can be taken for calculation from the Appendix to the balance sheet. This value is in column 3.

Essence of the method

The EBITDA indicator, the calculation formula for which was presented above, involves the calculation of interim earnings before interest and taxes EBIT. This approach allows you to understand all the stages of calculating the absolute results of a company’s activities by category.

EBITDA is the company’s profit already “cleared” of depreciation, interest and taxes. It makes it possible to estimate the real amount of net income of the organization. It is not affected by investments (adjusted for depreciation), debt obligations (adjusted for interest), or tax legislation (income tax).

To the question: “EBITDA - what is this concept in simple terms?”, the answer will be: profit from a certain point of view. This approach allows you to compare enterprises in the same industry based on the magnitude of their operating results. They do not include the debt burden, the number of investments and the current tax regime.

Even if companies apply different approaches to organizing accounting policies for depreciation, revaluation of assets, with different tax rates and amounts of debt, they can be compared. This is quite convenient for being able to draw conclusions about the real state of affairs at the enterprise.

Nuances of using the indicator

There are several nuances in using the EBITDA indicator. What this indicator means in simple terms was defined above. Based on this, it should be noted that using this approach, information about the enterprise’s investment needs is not disclosed.

If an organization is characterized by a high depreciation load and the need for reinvestment, the user of the information receives an incomplete picture. For example, in the mining industry, adjusting for depreciation significantly increases profits.

Therefore, the considered indicator must be considered in conjunction with other approaches and methods (for example, EBIT). Values ​​such as net and operating profit, as well as gross margin, will help with this.

Presentation in IFRS reporting

To understand what EBITDA is, you need to look at the financial statements. Most often, enterprises present such indicators in additions, releases to the report, and various presentations. But quite often it happens that this approach to disclosing net income can be found directly in financial forms. These include the statement of comprehensive income and notes.

It is not prohibited to use this approach when generating such documentation. IFRS does not impose special requirements for the disclosure of such indicators. But given the importance of this technique, it is still recommended to disclose such information to users.

Having familiarized yourself with the concept of what EBITDA is, you can come to the conclusion that this is an indicator of net profit, viewed from a certain angle. It is important for planning and conducting investment by companies, allowing you to compare production in the same industry.

EBITDA margin is the profitability of a company's activities in monetary terms. Let's look at the meaning of the indicator, the formula and an example of calculation.

In this article you will learn:

The main indicator of a business at all times is the income received by its owner. The higher the income, the higher the owner's satisfaction. But this is only true if the owner has no alternative, for example, to sell the business and invest all the funds in another business, shares, deposits or some “new product,” for example, “people's” OFZs. How can he compare the profitability of his business and alternative investments?

Another aspect is the assessment of the work of hired management and personnel. Do they perform their functions well? Maybe another manager does it better? How do our results compare to other companies? Is it worth giving bonuses to staff this year? Evaluating the effectiveness in this case is a non-trivial task.

For both the first and second problems, the solution is to use a relative profitability indicator. This tool is very useful and widely used in financial management, and has a very wide range of varieties for all occasions.

There are several indicators used in financial analysis, but they can be divided into three groups:

1. Return on sales (see how to calculate it) .
2. Return on assets.
3. Return on capital.

Download useful documents:

EBITDA margin

One of the options for calculating return on sales is its assessment by EBITDA - EBITDA margin. EBITDA is a measure income, artificially close to operating cash flow, it does not take into account interest income and expenses, and is also not reduced by a non-cash indicator - depreciation. Therefore, to some extent, EBITDA margin is the profitability of the company's activities in monetary terms.

Earnings before interest, taxes and depreciation is an indicator denoted by the abbreviation EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which has already taken root in the practice of Russian financial analysis and management. EBITDA is a synthetic tool that allows you to evaluate the financial result of a company’s operating activities, avoiding the influence of the capital structure effect (we do not exclude interest on borrowed capital and for loans provided from the calculation of the indicator), taxes (we do not deduct taxes when calculating the indicator) and depreciation (we return the amount of accrued depreciation into the calculation of the indicator). The EBITDA formula for calculating the balance sheet shows the “cash” content of the profit, bringing the assessment closer to the value of the operating cash flow.

The formula for calculating EBITDA margin is as follows:

Calculation example

Suppose we have the following information about the financial result of the company “Evaluation and Analysis” (Table 1).

Table. Company financial indicators

Indicator	Reporting period	Previous period
Cost of goods sold
Gross profit
Business expenses
Administrative expenses
Profit (loss) from sales
Other expenses and income:
Interest receivable
Interest payable
Profit before taxes
Income tax (20%)
Depreciation (for reference)

Then EBITDA margin (Reporting period) = (25,920 + 6,480 + 600 + 3,450) / 100,000 = 36,450 / 100,000 = 36.45%

EBITDA margin (Previous period) = (20,000 + 5,000 + 1000 + 3,450) / 100,000 = 29,450 / 1,00,000 = 29.45%.

As we can see, according to the results of the EBITDA margin analysis, the company’s sales efficiency has noticeably increased while revenue remains at the same level, which may indicate cost optimization (cost reduction) and increased management efficiency ( reduction of management costs ) and marketing (reducing business costs).

If revenue had increased in our example, then part of the increase in EBITDA margin would also be associated with changes in market conditions.

There is no standard for EBITDA margin, but it definitely must be positive - otherwise the company’s activities are unprofitable. The target value depends on the industry level of the indicator value, the position of the company, and the subjective assessments of the owner. In most situations, EBITDA margin is assessed over time and in comparison with peers and the industry in which the company operates.

EBITDA margin vs. Profit margin

The company's net profit for the period is the resulting indicator of management's activities for the reporting period, but which takes into account all income and expenses related to the company, and not just those that are directly related to the main activity. So, net profit includes interest on investments made earlier, takes into account payments for debt service, as well as taxes, the amount of payments for which depends on the company’s policy, in particular, an increase in interest payments and depreciation reduces the tax base. Net profit is thus influenced by the financing structure (through interest) and the policy of investment in equipment and others. non-current assets (through depreciation).

Let's calculate the net profit margin for our example:

The formula is similar to the EBITDA line calculation formula, but the numerator is net profit.

Profit margin (reporting period) = 25,920 / 100,000 = 25.92%

Profit margin (previous period) = 20,000 / 100,000 = 20%.

As can be seen from the calculation, the net profit margin in 2017 is significantly lower than the EBITDA margin; this is normal for most profitable companies. An exception may be companies that in their activities receive a large income related to the item “Interest receivable”.

Return on sales, calculated by EBITDA, characterizes the operational efficiency of a business, and can be a criterion for assessing the efficiency of companies of different sizes, since unique and random factors not related to the quality of operations as such are removed from its calculation. Whereas profitability, assessed by net profit, contains the final aggregated result of the company’s activities and carries the influence of those very random factors, possibly manipulations, features of investment policy, equipment purchases, etc.

The indicator is used by investors and specialists in the field of mergers and acquisitions when comparing businesses in the same field, but possibly having different ownership and capital structures.

Disadvantages of EBITDA margin

The advantages of an indicator can turn into disadvantages if you do not understand its specifics and use it incorrectly. Once again, I emphasize the fact that EBITDA margin reflects the quality and efficiency of the company’s operations, not the company as a whole. Therefore, taking into account only this as the only criterion for selecting an investment, we risk acquiring a company burdened with high debt or a company that requires deep modernization of technological processes with large-scale investments in new equipment.

EBITDA appeared in the mid-80s in the United States in the wake of the popularity of buyouts of enterprises by their own management (MBA transactions - management-buy-out), the task of management was to quickly assess the ability to repay the debt arising from such a transaction financing scheme with the company's cash, therefore it was a synthetic indicator EBITDA has been developed - the monetary result of the company's operating activities. Management soberly assessed the prospects and emerging opportunities in managing the acquired business, but the bank/investor had to show that already within a short planning horizon the company was able to withstand servicing the loan/loan. Thus, EBITDA and indicators based on it are not suitable for analyzing a company over a long planning horizon.

Another drawback is that the EBITDA indicator is not regulated by standards and can be interpreted rather loosely and change methodologically from year to year, and its content in annual reports may change accordingly.