What Is EBITDA?
Earnings before Interest Tax Depreciation & Amortization in short EBITDA is useful in knowing how efficient the company’s operating model, in other words it tells us about the competitiveness of the management in saving money from expenses and to create better operating revenue for the company.
Higher EBITDA shows consistency and efficiency in the management’s operational capabilities. Hence when doing the fundamental analysis look and compare companies which have higher and better EBITDA then it peers.
How EBITDA Is Calculated?
The formula to calculate EBITDA is:
EBITDA = [Operating Revenues – Operating Expense]
Operating Revenues = [Total Revenue – Other Income]
Operating Expense = [Total Expense – Finance Cost – Depreciation & Amortization]
In other words, EBITDA= [Total Revenue – Other Income] – [Total Expense – Finance Cost – Depreciation & Amortization]
Let us take an example to understand it better, for this you would need profit and loss statement also known as Income Statement of a company, which is easily available and given in companies annual report.
For understanding purpose I have taken Tata Motors Limited (TML) Annual report, you can download Tata Motors Limited annual report here or even can get it from its website.
Standalone Financial statements represent the company’s standalone numbers/ financials and do not include its subsidiaries’ financials.
Whereas, the consolidated numbers include the companies (i.e. Standalone financials) and its subsidiaries financial statements.
Hence you should look through the consolidated financial statements as it represent the company’s financial position better.
Let us look at P&L statement of Tata Motors Limited (TML) to understand how EBITDA gets calculated, take a look at below image taken from its AR.
As you can see from above P&L of TML,
Total revenue = Rs.249,794.75 cr,
Other Income = Rs.2,643.19 cr
As we know EBITDA= [Total Revenue – Other Income] – [Total Expense – Finance Cost – Depreciation & Amortization]
Let us solve the first equation,
[249,794.75 – 2,643.19] = Rs.2,47,151.56
Now, the second part of the equation,
Total Expense = Rs.249,151.20
Finance Cost = Rs.8,097.17
Depreciation & Amortization = Rs. 23,546.71
[249,151.20 – 8,097.17 – 23,546.71] = Rs.2,17,507.32
EBITDA = [2,47,151.56 – 2,17,507.32] = Rs. 29,644.24 crore
An EBITDA of Rs.29,644.24 Cr means that the company has retained Rs.29,644.24 Cr from its operating revenue of Rs.2,47,151.56 Cr.
In other words out of Rs.2,47,151.56 Cr the company spent Rs.2,17,507.32 Cr towards its expenses. But how do you know it is a good number or bad, for this you have to either compare the same, i.e. EBITDA of TML peers such as Maruti, Mahindra, etc. as well as look out for last atleast 5 years EBITDA numbers to get a reference.
Now let us proceed further to know about the EBITDA Margin.
What Is EBITDA Margin?
In simple terms EBITDA Margin tells us how profitable in percentage terms the company is at an operating level. Higher the EBITDA margin better it is for the health of the company, as it shows company managements skills in handling money.
One should compare the company’s EBITDA margin versus its peers to get a sense of the management’s efficiency in terms of managing their expense.
How EBITDA Margin Is Calculated?
The formula used to calculate EBITDA Margin is:
EBIDTA Margin = EBITDA / [Total Revenue – Other Income]
Continuing the above example of Tata Motors Limited the EBITDA Margin calculation for the FY21 is as follows:
EBITDA = Rs. 29,644.24 crore
Total revenue = Rs.249,794.75 cr,
Other Income = Rs.2,643.19 cr
EBIDTA Margin = 29,644.24/[249,794.75 – 2,643.19] = 12%
Hence, TML have achieved EBITDA Margin of 12% for FY21, also keep in mind a plus minus of few points up and down is adjustable.
This means, In percentage terms, the company spent 88% of its revenue towards its expenses and retained 12% of the revenue at the operating level, for its operations.
Remember, EBITDA Margin is a financial ratio on its own conveys very little information. To make sense of it, we should either see the trend or compare it with its peers. Going with this, a 12% EBITDA margin conveys very little information.
To makes some sense of the EBITDA margin, let us look at last 5 years EBITDA Margin of TML
EBITDA Margin |
Year |
11.52% |
2017 |
12.50% |
2018 |
-0.66% |
2019 |
6.85% |
2020 |
As you can see on average the EBITDA have been in range of 12%, however in last 2 years it has been disrupted badly , but this year FY21, it again reclaimed the same level of 12%, which shows a sign of great improvement.
This is a good sign as it shows consistency and efficiency in the management’s operational capabilities. Having said that, both the EBITDA margin and EBITDA growth are quite impressive we still do not know if it is the best.
To find out if it is the best one needs to compare these numbers with its competitors. In the case of TML, it would be Maruti and Mahindra.
So checkout their respective EBITDA Margin, you can either calculate the same from its AR or can used the data which is available on any stock analysis websites. But remember, doing it from AR will be more good as sometime you will find the data on certain website mismatched.
I hope now you have the basic understanding of what is EBITDA and EBITDA Margin, But this is not the end, there are financial statements you should read and understand i.e. Balance sheet, Cash Flow Statement and profit and loss statement to gauge the complete knowledge about how company have performed in an financial year.
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