EBITDA, which stands for earnings before interest, taxes, depreciation and amortisation, is the profit a company earns from running its business operations, calculated before the interest on borrowings, income tax, depreciation of assets and amortisation of intangible assets are deducted. Individuals searching for what is EBITDA are looking for this figure of operating profit.
The figure shows how much the core business earns from its operations, before financing costs, tax and non cash charges are taken out. It is not a recognised metric under the Indian Accounting Standards (Ind AS), and no regulator defines it, so each company decides how it calculates the number.
How companies arrive at the number
Companies use two methods. In the first, tax expense, finance costs, and depreciation and amortisation are added to net profit. In the second, depreciation and amortisation are added to operating profit, also called earnings before interest and tax (EBIT).
For a company with a net profit of Rs 100, tax of Rs 30, interest of Rs 20 and depreciation of Rs 50, the EBITDA will be Rs 200. On revenue of Rs 1,000, the margin, which is EBITDA divided by revenue and multiplied by 100, will be 20%.
Ind AS and SEBI is the statutory regulator of India's securities market, with the legal duty to protect investors and to promote and regulate that market. Read the full meaning of SEBI rules do not require EBITDA as a line item, so companies may show an adjusted EBITDA on their own terms. Ind AS 116 on leases, effective from 1 April 2019 for most listed companies, moved lease costs into depreciation and finance charges, and reported EBITDA has increased as a result.
Why investors look at it, and what it hides
Analysts in India commonly use enterprise value to EBITDA (EV/EBITDA) to value capital heavy companies such as Reliance, telecom and infrastructure firms, and the ratio ignores differences in debt and tax. Investors also check the EBITDA margin and the interest coverage, which is usually EBIT divided by interest, though some analysts use EBITDA divided by interest.
EBITDA is often mistaken for net profit or cash flow, but it is neither. Interest, tax and the spending needed to maintain assets still have to be paid out of it, so the cash left with company is lower.
Since no regulator defines the figure, adjusted EBITDA differs from one company to another, and comparing two companies can mislead.