In business acquisitions, but also when investing or applying for financing, the concept of EBITDA is used a lot. In this article, we will take a closer look at what exactly EBITDA is, how to calculate it and why it is used so much.
Inhoud:
- What is EBITDA?
- Why is EBITDA important?
- EBITDA and enterprise value
- How can you calculate EBITDA?
- What is the difference between EBITDA and EBIT?
- Points of attention EBITDA valuation
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1. What is EBITDA?
EBITDA is the abbreviation of an English term, namely: Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). Translated into Dutch: earnings before interest expenses, taxes, depreciation and amortization. It is basically the gross profit including all financial deductions (tax, interest and depreciation) and shows how much cash flow a business can generate.
2. Why is EBITDA important?
EBITDA is a profit concept that you basically can't manipulate, which makes it a good measure for comparing businesses. It reflects the performance of a business well because it shows the earnings before the accountant and financial deductions are involved.
3. EBITDA and enterprise value
EBITDA also gives a good indication of the profitability and thus the value of a business. To value a business, the formula "EBITDA x multiple" is often used, so the greater the EBITDA, the higher the value of the business. Although it is an indication of value at a given time, it reflects well how a business is doing.
Moreover, EBITDA in turn affects the amount of the multiple itself. Scientific research has shown that the smaller a company is, the greater the chance that the expected free cash flows will not be realized. Small businesses are simply more volatile and risky.
TIP: Every six months the Brookz Takeover Barometer is published with the average multiples per sector.
4. How can you calculate EBITDA?
Even without in-depth economic knowledge, it is possible to calculate EBITDA. Net profit after taxes is the basis of the calculation. Below is an example of how to arrive at that net profit from the income statement.
Example:
Net revenue € 1,000
-/- purchase value of revenue € 350
= Gross margin € 650
-/- Depreciation € 50
-/- Miscellaneous costs € 200
= Operational result € 400
-/- Balance of interest income and expenses € 50
= Net profit € 350
-/- Taxes € 50
= Net profit after taxes € 300
From this setup, you can then calculate EBITDA fairly easily:
Net profit € 300
+ Depreciation/amortization € 50
= Cash flow € 350
+ Taxes € 50
+ Interest income and expenses € 50
= EBITDA € 450
The formula above includes several terms that may deserve some additional explanation.
Net profit: This is nothing but the net income of a company. On the income statement, the profit is at the bottom of the calculation, as the net income
Interest income and expenses: Under earnings, you'll find interest. This interest depends on several factors, such as the type of business and the branch, in which the company operates. In financial documents, you will find this expense under the category of non-operating expenses. Good to know: capital-intensive industries often have higher interest expenses on the income statement because of direct high investments in physical assets. Consider the aircraft industry, chemical industry and shipbuilding.
Taxes: Mainly relevant because of the varying rates. The tax rate varies from business to business and is also subject to annual economic influences. On the income statement, you will also find this expense in the non-operating expenses section;
Depreciation & amortization: We'll take both of these items together for a moment because they both revolve around depreciation. On the income statement, you'll find write-offs under operating expenses. Certain capital investments become worth less, through their use, and that should be recorded.
5. What is the difference between EBITDA and EBIT?
Although EBITDA and EBIT are often used interchangeably, they are not equivalent. In fact, with EBIT you assume the operating result after depreciation and amortization, which excludes financial results and taxes. This article on Brookz takes a closer look at the differences between the two terms.
6. Points of attention EBITDA valuation
Regardless of the discussion about valuation with EBITDA, and the widely varying multiples, it is good to remember that rules of thumb are not set in stone. As a buyer, for example, you need to be alert to the fact that rules of thumb do not take into account a specific situation.
Every business is unique. So look beyond the rules of thumb and do thorough research. Assess the business to be bought before you blindly rely on rules of thumb.
