What is EBITA?

Key figures are important when it comes to assessing the economic success of a company. To make informed decisions, you need targets that you can work towards. It doesn’t always make sense to use a company’s profit as the sole measure of success. There are other in­dic­at­ors that give you a more realistic idea of the company’s success. EBITA is one of them, but what is EBITA, and how can it be cal­cu­lated?

When de­term­in­ing a company's profit or annual net profit, you also take into account income and expenses arising from in­vest­ments, interest on loans, taxes, and de­pre­ci­ation of various kinds. However, these items are usually only in­dir­ectly related to a company’s success. You tend to be able to influence them only by making fun­da­ment­al strategic decisions – for example, about the choice of company location or financing. De­pre­ci­ation, too, often has more to do with the corporate strategy than with the operative business.

The EBITA does not provide any in­form­a­tion about the net income you can actually credit to your company at the end of the year. This key figure excludes items that have a sig­ni­fic­ant influence on the operating success, but which do not provide any in­form­a­tion on whether your business performed well or badly in the past year. A further advantage of this value is that it works well as a com­par­at­ive value: Interest, i.e. capital income and capital costs as well as de­pre­ci­ation on in­tan­gible assets and taxes are dis­reg­arded, whereas de­pre­ci­ation on tangible assets is taken into account. This makes it possible to compare the operating success of different companies, not least across national borders.

According to the meaning of the term "amort­isa­tion," in­tan­gible assets are licenses, patents, software, etc. to which a concrete value can be attached. If they were created by the company itself, they can be included in the balance sheet if you wish, otherwise they are mandatory. If a specific operating lifespan can also be specified for such goods, they can be de­pre­ci­ated ac­cord­ingly.

In addition, there are in­tan­gible goods that can con­trib­ute to the value of a company, but do not have a concrete quan­ti­fi­able value them­selves, such as trade­marks, newspaper mastheads, pub­lish­ing rights, and lists of customers, etc.

In addition to interest costs and income, EBITA also excludes other ex­traordin­ary and non-recurring costs, or income that is not at­trib­ut­able to the company's operating success. Values like these can also distort the picture and make it difficult to compare your company with others.

With regard to its concept, EBITA sits between EBIT and EBITDA: These two in­dic­at­ors also omit some items, and they are suitable in various ways for working out the success of a company. The EBIT merely does not include interest and taxes, while de­pre­ci­ation is taken into account. On the other hand, EBITDA also excludes de­pre­ci­ation of property, plant, and equipment.

Since the law doesn’t require EBITA to be disclosed, there are also no binding rules for its cal­cu­la­tion. In principle, you have two different options for cal­cu­lat­ing EBITA: either based on profit or on annual net profit. You use the first method to calculate EBITA as an in­ter­me­di­ate step in the income statement. Use the total cost method for this:

However, you also have the option of cal­cu­lat­ing back from the annual net profit. You add the items (that EBITA does not take into account) to the result.

The EBITA cal­cu­la­tion can be explained quite well using an example con­sist­ing of two different fic­ti­tious companies. While the first company generated an annual net profit of $500,000, the second company generated $600,000. However, the two companies are based in different countries and do not finance them­selves in the same way. Based on the annual net profit, EBITA can be cal­cu­lated in this way.

The second company has not purchased any in­tan­gible assets with quan­ti­fi­able op­er­a­tion­al lifespans and does not intend to de­pre­ci­ate its own de­vel­op­ments. This means that there is no de­pre­ci­ation here. As a result, both companies have the same EBITA despite their different annual net profits.

Company B

The second company has not purchased any in­tan­gible assets with quan­ti­fi­able op­er­a­tion­al lifespans and does not intend to de­pre­ci­ate its own de­vel­op­ments. This means that there is no de­pre­ci­ation here. As a result, both companies have the same EBITA despite their different annual net profits.

Please note the legal dis­claim­er relating to this article.