Ebitda:what is it for and how to calculate

You have certainly heard or read the term Ebitda . But do you know what it means?

This is a very important concept for investors at all levels. It helps to understand the balance sheets of companies, helps to discover the potential of cash generation in the end activity and determines the evolution of productivity and efficiency over the years.

Are you interested? In this article, we will better understand what that word means, how to apply it in the analysis of publicly traded companies, how to do the calculation to find out a company’s Ebitda, what is the difference for Ebit and a practical example using Petrobras’ report with the disclosure of the consolidated results for the last quarter of 2016.

What is Ebitda

Ebitda is the acronym in English for Earnings before interest, taxes, depreciation and amortization . In Portuguese, “Earnings before interest, taxes, depreciation and amortization” (also known as Ebitda). It is a widely used indicator to evaluate publicly traded companies.

If you read an interview with a market analyst, you are likely to see a repetition of that term in several responses . And it is not by chance.

With it, it is possible to find out how much the company is generating with its operational activities, not including financial investments , loans and taxes.

Thus, the disclosure of Ebitda is a way for investors to find out what the company’s financial reality is and if it is improving its competitiveness and efficiency year by year.

But be careful: despite being an important indicator, Ebitda is not the only instrument for valuing companies on the stock exchange. It is important to analyze information such as leverage and profits, for example.

Next, we will better understand the concept of Ebitda, how to apply it and how to interpret the figures in the disclosure of balance sheets.

Ebitda concept

Ebitda represents the company’s operating cash generation, that is, how much the company generates resources only in its operating activities, without taking into account the financial and tax effects.

The definition is contained in the book Analysis of Financial Statements , by José Laudelino Azzolin (IESDE Brasil, 2012).

To make it clearer, let’s talk about the accounting professor Ariovaldo dos Santos, from the University of São Paulo:

” Ebitda shows a business’s cash generation potential , as it indicates how much money is generated by operating assets .”

Therefore, Ebitda is a very interesting number to analyze the company’s competitiveness and efficiency , especially in comparison year on year and with competitors.

This is due to the fact that the indicator does not take into account issues such as financing, taxes, amortization and depreciation of assets.

Thus, for example, two companies from different countries can be placed side by side on a spreadsheet without interference from the high interest that one pays or the lower taxes from the other.

Although widely used, this indicator, in itself, does not reveal the complete financial situation of the company. And it can lead to many errors , if it is not complemented with more data, according to Eduardo de Oliveira, partner responsible for corporate finance and company restructuring at Deloitte Touche Tohmatsu.

“People start using Ebitda as if it were an exact measure of company value, but it is an instrument that shows, at most, whether or not the business should be thoroughly analyzed”, says Oliveira.

What is Ebitda for

As already mentioned, Ebitda helps to analyze a company’s cash generation, measuring more accurately the productivity and efficiency of the business.

This is because it disregards some complex variables , such as borrowing, which can be analyzed from a specific perspective.

Knowing whether the company makes a profit or loss is fundamental, but relying only on this primary data in an analysis is not the best way to make a good financial diagnosis.

Ebitda helps to go beyond the financing and leverage environment in which the company operates and shows the operating situation more clearly.

But remember that when searching for a company, Ebitda is an indicator that should be used in conjunction with other numbers, such as net income, evolution of sales, cost situation, indebtedness and earnings per share.

How to calculate Ebitda?

To calculate the Ebitda, it is necessary to find the operating profit first . In Brazil, it results from the subtraction, from net revenue, of the cost of traded goods, of operating expenses.

Then, depreciation and amortization included in the cost of goods sold and operating expenses must be added to operating profit. The reason is that these accounts do not constitute an effective cash reduction in the period.

On the other hand, it is also possible to calculate Ebitda starting with the company’s net profit, that is, at the end of the income statement. Thus, it is necessary to add to the company’s net income, income tax (IR) and social contribution (CSLL), net financial result, depreciation and amortization.

For anyone thinking of investing in a publicly traded company on the Brazilian stock exchange, the good news is that they usually publish this indicator in their balance sheets, to facilitate the work of market analysts.

Operating profit

Operating profit is that generated by operating the business, subtracting administrative, commercial and operating expenses. It offers a very complete overview of the company’s financial results.

It is calculated with this formula:

Operating income = Gross profit – Operating expenses + Operating income.

This amount is part of the Statement of Income for the Year (DRE). This document is a summary of the results over a period, usually a year. It is one of the best tools for analyzing projects and is widely used in the market.

It is important not to confuse operating profit with gross profit. Gross profit, in fact, is an earlier stage: from it, administrative, commercial and operating expenses are subtracted to arrive at operating profit later.

Depreciation and amortization

The definition of depreciation may seem complicated, but it is not. It is the determination of a depreciable amount of an asset over its useful life, that is, the annotation of the reduction in the value of the assets due to wear or loss of utility, whether due to the action of nature, human action or obsolescence.

Depreciation occurs from the moment it is made available for use , when it arrives at the workplace in full working order. This depreciation calculation does not end when the asset is idle, unless it is fully depreciated.

The depreciation of a similar logic: is the systematic allocation of the redeemable value of intangible assets (such as patents and trademarks, for example) over time.

The basic difference between the two is that the first is imposed on physical assets , such as a desk, and the second, on intangible assets , such as rights or expenses with limited term, whether legal or contractual.

Ebitda application

To understand the application of Ebitda, we will start from a hypothetical Statement of Income (DRE) of a company XYZ, which has Gross Operating Revenue of R $ 12,000.00.

Come on?

There, we have the necessary information for the calculation of Ebitda.

We follow:

See how it is not as difficult as it looked?

Below, we are going to check an example of an Ebitda released by Petrobras, which serves to illustrate how this type of announcement occurs and how these numbers are released to the investor.

Practical example of Ebitda

In March 2017, Petrobras [i] released its financial results for the last quarter of 2016. Among the data, is the company’s Ebitda and its evolution over the year.

Information like this is very useful for investors who are considering investing in Petrobras.

With these data, they can make better informed decisions about the state’s financial health and its prospects for cash generation in the coming months.

But before reaching Ebitda, it is important to contextualize the results and show the importance of other indicators.

In the 2016 consolidated, Petrobras had a net loss of R $ 14.824 billion . This was the third consecutive year of losses for the state-owned company, which had registered a negative record of R $ 34.8 billion in 2015 and losses of R $ 21.6 billion in 2014.

On the other hand, in the last quarter of 2016, Petrobras had a profit of R $ 2.5 billion , after a loss of R $ 16.4 billion in the third quarter. The market forecast, however, was for a higher profit of R $ 3.7 billion in the last period of the year.

In the same report, the state-owned company explained the reasons for the recent losses(revaluation of assets) and reported the reduction in its indebtedness, which fell by 20% from the end of 2015 (by R $ 392 billion) to the end of 2016 (in R $ 314.2 billion).

In addition, the publication provides for another year without dividend payments to shareholders, as the accounts still do not allow it, according to Petrobras President Pedro Parente.

Finally, that information we were waiting for: the Ebitda. It was R $ 24.8 billion in the fourth quarter and R $ 88.7 billion in 2016, 16% higher than in 2015.