EBITDA is an essential financial indicator for evaluating the operational performance of a company. This English acronym stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization”. Close to the Gross Operating Surplus (EBE) used in France, EBITDA offers a clear vision of the profitability of a company, independently of its financial and tax structure. Let’s discover together the subtleties of this essential financial tool and its impact on the analysis of entrepreneurial performance.
Understanding the usefulness and calculation of EBITDA
EBITDA turns out to be a operational profitability indicator particularly appreciated by financial analysts and investors. It assesses a company’s ability to generate profits from its main activities, without taking into account the following elements:
- Interest charges linked to debt
- Profit taxes
- Depreciation and provision allocations
To calculate EBITDA, two main methods are used:
- The additive method : We start from the net result and add the excluded elements
- The subtractive method : We start with the turnover and subtract the operating expenses
Here is a summary table of the two calculation methods:
| Additive method | Subtractive method |
|---|---|
| Net income + Interest charges + Taxes + Allocations to depreciation and provisions |
Turnover excluding tax – Purchases – External loads – Personnel costs – Other charges |
Using EBITDA allows us to compare the performance of different companies more easily, even if they operate in distinct sectors or are subject to varied tax regimes. This comparability makes it a valuable tool for investors and financial analysts when evaluating companies.
Interpretation and use of EBITDA in financial analysis
The interpretation of EBITDA provides valuable information on the financial health of a company. A positive EBITDA generally indicates good operating profitability, while a negative EBITDA can indicate structural difficulties. However, it is essential not to limit oneself to this single indicator and to put it into perspective with other financial data.
EBITDA is frequently used to calculate important financial ratios, including:
- The net debt/EBITDA ratio
- : This ratio measures the company’s ability to repay its debt. The lower it is, the better the financial health of the company is considered. The
EBITDA/turnover ratio
- : It indicates the company’s operating margin and its efficiency in generating profits from its sales. These ratios are particularly useful for: Assessing the
- debt capacity of a company Comparing the
- operating performance between different periods or companies Determining the
valuation of a company during mergers and acquisitions For example, in the European mid-cap market, a
is now commonly used to estimate the value of a company. This upward trend in multiples is partly explained by the decline in interest rates and returns expected by investors in recent years.
What is EBITDA and how to calculate this key financial indicator to assess profitability
- EBITDA in practice: examples and comparisonsTo illustrate the importance of EBITDA in financial analysis, let’s look at some concrete examples of companies that have recently communicated on this indicator:
- Akuo, a renewable energy company, reported a 13% increase in its EBITDA to €153 million in 2022. This increase reflects an improvement in its operational performance.
Nueva Pescanova , a seafood group, saw its EBITDA double to €80 million in 2022. Even more impressive, its EBITDA/sales ratio increased from 4.4% to 7.4%, indicating a significant improvement in its profitability.
These examples show how EBITDA can reflect the growth and operational efficiency
of a company. However, it is imperative to note that EBITDA should not be considered in isolation. Other indicators, such as EBIT (earnings before interest and taxes), provide essential complementary information.
EBIT, obtained by subtracting depreciation and provisions from EBITDA, provides a more accurate view of profitability by taking into account asset wear and tear. Comparing EBITDA to EBIT can reveal crucial information about a company’s
- cost structure and capital intensity. Limitations and Precautions in Using EBITDA Although EBITDA is a powerful tool for assessing financial performance, it has some limitations that should be noted: It does not take into account the
- investments needed to maintain the business (CAPEX) It can mask
- short-term cash flow problems It does not reflect
- changes in working capital requirements
Its calculation is not standardized, which can make comparisons between companies difficult
- For a complete financial analysis, it is recommended to:
- Combine EBITDA with other financial indicators (cash flow, net income, etc.)
- Examine EBITDA trends over several periods
- Compare EBITDA with that of similar companies in the same sector
Take into account the overall economic and sectoral context Ultimately, EBITDA remains a key financial indicator