24 Jun, 2025
4 mins read
Understanding a company’s financial health goes beyond just looking at profits. One key metric used by analysts and investors is EBITDA. It helps assess a company’s operational performance without the influence of financing and accounting decisions. In this blog, we’ll explain what is EBITDA, how it’s calculated, why it’s important, and how it differs from other financial metrics.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It measures a company’s profitability from core operations before accounting for financial costs and non-cash expenses. In other words, EBITDA meaning revolves around evaluating how much a company earns from its actual business activities.
In simple terms, EBITDA shows how much money a business is making from its operations, ignoring expenses that don’t directly relate to day-to-day operations.
This metric is particularly useful for comparing companies within the same industry, especially when they have different capital structures or accounting methods.
EBITDA importance is widely recognised in financial analysis for several reasons:
However, it’s important to remember that EBITDA is not a substitute for net profit or cash flow. It’s just one of many tools used to analyse a business.
There are two main ways to calculate EBITDA. The EBITDA formula is:
Using operating profit:
EBITDA = Operating Profit + Depreciation + Amortisation
Using net profit:
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation
The choice depends on which figures are available in the financial statements. This EBITDA formula helps provide a standardised method of performance evaluation.
Here’s how you can perform EBITDA calculation step by step:
Key points:
Let’s consider a simple EBITDA example:
|
Particulars |
Amount (in ₹ lakhs) |
|---|---|
|
Net Profit |
₹200 |
|
Interest |
₹50 |
|
Taxes |
₹30 |
|
Depreciation |
₹40 |
|
Amortisation |
₹10 |
EBITDA = 200 + 50 + 30 + 40 + 10 = ₹330 lakhs
So, in this EBITDA example, the company has an EBITDA of ₹330 lakhs.
EBITDA margin shows how much operating profit a company makes for every rupee of revenue, before deducting interest, tax, depreciation, and amortisation.
Formula:
EBITDA Margin = (EBITDA / Revenue) × 100
This helps in comparing profitability across companies, regardless of their size.
Example:
If a company has revenue of ₹1000 lakhs and EBITDA of ₹330 lakhs:
EBITDA Margin = (330 / 1000) × 100 = 33%
The EBITDA coverage ratio measures a company’s ability to pay off its interest obligations using EBITDA.
Formula:
EBITDA Coverage Ratio = EBITDA / Interest Expense
It’s especially useful for lenders and investors to assess how comfortably a company can handle its debt.
Example:
If EBITDA is ₹330 lakhs and interest expense is ₹50 lakhs:
EBITDA Coverage Ratio = 330 / 50 = 6.6
This means the company earns 6.6 times its interest payments from operating earnings.
|
Advantages |
Disadvantages |
|---|---|
|
Focuses on core operations |
Ignores important expenses like debt repayments |
|
Helps in cross-company comparison |
Can be misleading if used alone |
|
Useful for valuation |
Not recognised by accounting standards (non-GAAP/Ind-AS) |
|
Gives a cash flow proxy |
Can hide poor financial health if used improperly |
EBITDA is a valuable metric that gives a clearer picture of a company’s operational performance, especially when comparing businesses across industries. It strips away financing and accounting effects to focus purely on earnings from operations. However, it's important to use EBITDA alongside other financial indicators such as net profit, cash flow, and debt levels for a complete view of financial health.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It shows a company’s profitability from its core operations.
Not necessarily. While a higher EBITDA suggests better operating performance, it doesn't account for debt, tax liabilities, or capital needs. It's best used alongside other metrics.
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