The EBITDA formula is considered an important indicator to evaluate core operating efficiency, eliminating the impact of interest expenses and depreciation. According to international standards, the EBITDA formula is calculated as follows:
- From operating profit (EBIT):
| EBITDA = EBIT + depreciation + amortization expenses |
In which EBIT:
| EBIT = earnings before tax + interest expense + taxes |
- Profit before tax:
| EBITDA = pre-tax profit + interest expense + depreciation |
- Profit after tax:
| EBITDA = profit after tax + corporate income tax + interest expense + depreciation |
This index not only helps managers understand the profitability of core activities, but is also a measure that investors and credit institutions often use when comparing businesses in the same industry.
EBITDA concept
EBITDA is an important financial indicator that reflects the ability of a business to generate profits from its core business activities, without taking into account financial or accounting factors such as corporate income tax, interest expense, depreciation and asset allocation. By eliminating these factors, EBITDA allows managers and investors to focus on evaluating the actual operating results and profitability of the business's core activities, instead of being influenced by tax policy or capital structure.
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization, which means earnings before interest, taxes, depreciation of tangible and intangible assets. Specifically:
- Earnings Before Interest: Is the profit of an enterprise determined before deducting interest expenses arising from financial debts.
- Taxes: The amount of money a business must pay to the tax authorities.
- Depreciation: is the loss of value of tangible fixed assets (such as factories, machinery, equipment, etc.) over time, reflecting wear and tear.
- Amortization: The net decrease in value of intangible assets such as patents and trademarks over time..
In financial statements, the EBITDA formula is considered an important measure to evaluate the core operating performance of a business. This index allows investors and managers to analyze the ability to generate actual profits without being influenced by financial factors such as interest expenses, taxes or depreciation. Applying the EBITDA formula not only helps businesses focus on profits from core operations, but also serves as a basis for comparing and contrasting business performance between businesses in the market more objectively.
The role of the EBITDA formula in financial analysis
The EBITDA formula is one of the widely used indicators in financial analysis because the EBITDA formula focuses on net business performance and eliminates the effects of capital structure, depreciation policy and taxes. The table below will explain in detail the practical role of the EBITDA formula:
Board: The Role of the EBITDA Formula in Financial Analysis
| Role | Content |
| Performance measures | The EBITDA formula separates the financial and non-cash accounting elements to reflect the profit from the core business. The EBITDA formula helps managers and investors answer the question: How much profit is the business actually generating before calculating interest, taxes and depreciation? |
| Industry Comparison Tool | Because it excludes interest and taxes (depending on capital structure and tax policies), the EBITDA formula is convenient when comparing companies in the same industry. In addition, the EBITDA formula is also used to compare EBITDA margin (EBITDA / Revenue) to evaluate the operating profit margin efficiency between businesses. |
| Basis of valuation | From the EBITDA calculation formula, the required EBITDA index can be calculated. From there, investors analyze the EV coefficient (Enterprise Value) by taking EV / EBITDA to evaluate the enterprise value with operating profitability. |
| Leverage and credit risk assessment | Ratios like Net Debt / EBITDA are used to measure a company's ability to pay its debts. Banks often use the EBITDA (or adjusted EBITDA) formula in their terms and conditions and assess breaches of terms. |
Thus, through the above table, we can see that the role of the EBITDA formula is not only a simple calculation but also a financial tool that helps businesses, investors and credit institutions accurately evaluate operating efficiency. When applied correctly and combined with other supporting indicators, the EBITDA formula becomes an important foundation in the management, valuation and sustainable development strategy of the business.
Formula for calculating EBITDA most accurate
To calculate accurately, businesses can immediately apply the international standard EBITDA calculation formula below:
- From operating profit EBIT
| EBITDA = EBIT + depreciation + amortization expenses |
In which EBIT
| EBIT = Earnings before tax + interest expense + taxes |
- Profit before tax
| EBITDA = Profit before tax + interest expense + depreciation |
- Profit after tax
| EBITDA = Profit after tax + corporate income tax + interest expense + depreciation |
For example: Suppose that in the fiscal year, enterprise A has information such as pre-tax accounting profit of 50 billion, interest expense of 100 billion and depreciation of 30 billion.
Apply EBITDA calculation formula number 2:
| EBITDA = Profit before tax + depreciation + interest expense = 180 billion |
Thus, based on the EBITDA calculation formula, the EBITDA of enterprise A is 180 billion VND.
EBIT of enterprise A:
| EBIT = Profit before tax + interest expense = 150 billion VND. |
Thus, EBIT of enterprise A is 150 billion VND.
The meaning of EBITDA formula in measuring business performance
In addition to understanding what the EBITDA index is, managers and investors also need to master the EBITDA calculation formula to apply it effectively in financial analysis. This is one of the important indexes reflecting the core operating efficiency of the enterprise, helping to eliminate the impact of interest, taxes and depreciation costs. Therefore, EBITDA shows the actual business performance, supporting enterprises, owners and investors to have a more accurate view of production and business efficiency as well as the ability to generate sustainable profits in the long term.
For business owners
Mastering the EBITDA formula not only helps businesses understand the nature of this index but also creates a basis for maximizing its value in financial analysis and management. Specifically:
- Assessing a business's profitability: By eliminating factors such as interest, taxes and depreciation, EBITDA more accurately reflects the efficiency of generating profits from core production and business activities.
- Compare performance over time: Because it is not affected by fluctuations in interest rates or tax rates, business owners can easily track and compare growth over each period.
- Convincing investors: When presenting reports, EBITDA is a powerful indicator that helps businesses convey a positive picture of financial health and operating capacity, thereby increasing investor confidence.
For investors
To maximize the value from the EBITDA calculation formula, investors and managers often apply this index in many important aspects of business analysis:
- Assessing cash flow generation: EBITDA is a useful tool to determine the profitability of core operations, thereby considering the ability to quickly pay back capital and long-term growth potential.
- Comparing companies within the same industry: By removing the impact of taxes and interest, EBITDA makes comparing performance between companies more transparent and objective.
- Estimating Enterprise Value: Popular valuation metrics such as EV/EBITDA are often used to determine fair value, helping investors identify whether a business is overvalued or undervalued relative to its intrinsic value.
Although the EBITDA formula is commonly used in financial analysis, many people still easily confuse EBITDA and EBIT because these two indicators reflect profits from business operations. However, to understand the true nature and avoid errors in evaluating business performance, it is necessary to clearly distinguish EBIT and EBITDA.
Distinguishing features of EBIT and EBITDA
Once you have a clear understanding of the concept of EBITDA and the detailed formula for calculating EBITDA, it becomes easier to differentiate between EBITDA and EBIT. Although these two indicators have many similarities, they are often compared to evaluate the overall performance of a business. The table below will show the difference between these two indicators:
Board: Distinguishing between EBIT and EBITDA
| EBIT | EBITDA |
| EBIT is Earning Before Interest and Tax. | EBITDA is Earning Before Interest, Tax, Depreciation and Amortization which means the index of profit before interest, tax and depreciation. |
| Measure of corporate profits. | Measure of business performance of an enterprise. |
| Formula for calculating EBIT: EBIT = Earnings before tax + Interest expense. | Formula for calculating EBITDA: EBITDA = EBIT + Depreciation. |
Through the comparison table above, it can be seen that EBIT and EBITDA are both important metrics for analyzing corporate finance, but each index serves a different purpose. While EBIT focuses on earnings before interest and taxes, the EBITDA formula helps reflect core operating performance when excluding depreciation. Understanding this difference helps managers and investors apply the right index in each situation, thereby making more accurate decisions.
So why is the EBITDA formula considered an accurate measure of business performance?
Because the EBITDA formula has eliminated factors that do not directly come from core business activities, such as interest expenses, corporate income tax or depreciation expenses of fixed assets. These factors may vary depending on financial policies, capital structure or legal regulations in each country, but do not reflect the nature of the business's operating capacity.
By focusing only on the results generated from the core business activities, the EBITDA formula helps managers and investors clearly see the real efficiency in generating profits from revenue. For example, two companies in the same industry may differ in debt ratio or depreciation policy, leading to differences in net profit. However, if compared using the EBITDA formula, we will see more clearly which company operates more efficiently, regardless of the difference in capital or financial strategy.
In other words, the EBITDA formula is a “fair measure” to evaluate business performance, helping to eliminate disturbances from external factors and providing a more honest view of the internal operating strength of the business.
Cases where the EBITDA calculation formula is applied
The EBITDA formula is widely used in many cases to analyze and evaluate the financial performance of enterprises. Especially in industries with large asset proportions and high depreciation costs, the EBITDA formula is often used to help reflect operating profits, support enterprises to improve the image of financial reports and increase confidence from investors.
In addition, the EBITDA formula is also an important tool for comparing the performance of businesses in the same industry or at different stages of development. This index often appears in the EV/EBITDA valuation model and in many cases can replace cash flow in quick analysis.
Not only that, investors and managers also exploit the EBITDA calculation formula through derived indexes such as EBITDA Margin, EBITDA/Depreciation Expense or Debt/EBITDA, to evaluate the profitability, financial leverage level as well as long-term growth prospects of the enterprise.
Advantages and disadvantages of the EBITDA formula
We need to consider both the advantages and disadvantages of the EBITDA formula. Like any measurement tool, the EBITDA formula offers important benefits but also has certain potential limitations. The table below will help to clearly distinguish the advantages and disadvantages of the EBITDA formula, thereby supporting investors and businesses to use this index more accurately.
Board: Advantages and disadvantages of the EBITDA formula
| Advantage | Disadvantages |
| Reflects core business performance: The EBITDA formula excludes depreciation, interest and tax expenses – factors that do not directly arise during the period. | For businesses with large depreciation costs, the EBITDA calculation formula can "beautify" the financial statements compared to reality. |
| Focus on actual operations: Helps investors assess the ability to generate profits from core business activities. | Net profits for these businesses are often low, so using the EBITDA formula can mask important financial weaknesses. |
| Support for business comparison: The EBITDA formula is applied to compare operating efficiency between businesses in the same industry, over many different periods. | Easily causes errors in valuation: If only relying on the EBITDA formula and ignoring other index formulas such as cash flow or net profit, investors may misjudge the real value. |
| Approaching Actual Cash Flow: Since depreciation is not a cash expense, the EBITDA formula better represents cash flow from operations. | Not a comprehensive reflection: The EBITDA formula cannot replace other indicators in financial analysis, especially in asset-intensive industries. |
The EBITDA formula is a useful tool for measuring business performance and comparing between businesses. However, when analyzing finances, it is necessary to combine the EBITDA formula with net profit and cash flow to have a comprehensive view, limiting the risk of mispricing.
Notes when applying the EBITDA calculation formula in business and investment
When applying the EBITDA calculation formula, businesses need to note the following points to ensure the EBITDA calculation formula produces effective results:
- Understand the EBITDA index as well as the EBITDA formula and what it means: The EBITDA formula only reflects profits before taking into account factors such as interest, taxes, depreciation and amortization costs. As a result, businesses can focus on evaluating core operating performance, but the formula for this index does not provide a comprehensive view of net profits after deducting important financial expenses.
- Combined with other index formula analysis: The EBITDA formula is just one of many formulas to help evaluate finances. Businesses need to refer to using additional index formulas such as ROE (Return on Equity), ROA (Return on Assets) and free cash flow to help provide a more complete perspective on business performance.
- Assessing the scale, industry characteristics and business cycle: Due to the characteristics of each industry with different investment levels and depreciation costs, the use of the EBITDA calculation formula needs to be placed in the specific context of the industry and business cycle, to ensure accurate comparison between businesses in the same industry.
- Be careful when making decisions: To attract investors, some businesses may "beautify" their reports by increasing the EBITDA index. Therefore, managers need to carefully evaluate the data to avoid being led by numbers that do not reflect reality.
Conclude
In summary, the EBITDA formula is a useful tool for businesses and investors to evaluate core operating performance, eliminating financial and accounting factors that interfere. However, for a more comprehensive and accurate view, EBITDA needs to be placed in the context of the industry, business cycle and combined with other financial indicators. If you are a business that wants to optimize financial reports, improve management capacity and increase investor confidence, let MAN – Master Accountant Network Accompany businesses in analyzing, consulting and implementing effective financial solutions.
Please contact us immediately. MAN – Master Accountant Network for advice and support.
Contact information
- Address: 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City.
- Mobile/ Zalo: +84 (0) 903 428 622 (Ms. Ngan)
- E-mail: nguyenthikimngan@man.net.vn
Editorial Board: MAN – Master Accountant Network