EBIDA is a ‘Profitability Metric’ used to measure the performance of a company or compare the performances of two or more companies.
EBIDA stands for Earnings before Interest, Depreciation and Amortization.
It is a lesser-known metric compared to its cousins – the EBITDA and the EBIT.
EBITDA stands for Earnings before Interest, Taxes, Depreciation and Amortization.
EBIT stands for Earnings before Interest and Taxes.
As you can see, each of these earnings – EBIDA, EBITDA and EBIT – take certain expenses into account while ignoring others.
Why is that?
That’s because companies in different industries operate differently – some need large capital expenditures before they can become operational, others take on debt, some others employ a large number of people and need no factories or real estate, while some others have large, automated factories and warehouses which require few people to operate.
And so, if you are analyzing a company’s performance or are comparing the performances of different companies it’s important to pick the right “type” of profitability.
This is especially important if you’re comparing companies in different industries, geographies or tax environments.
While EBIDA is not a commonly cited metric, you will see that it can be quite useful in some circumstances.
Let’s dive into it.
- What is EBIDA?
- How is EBIDA calculated?
- Comparing EBIDA, EBITDA and EBIT
- Weaknesses of EBIDA
- Key Takeaways
- Frequently Asked Questions
What is EBIDA?
As we’ve seen in the earlier section, EBIDA gives us a company’s Earnings before Interest, Depreciation and Amortization.
In other words, it shows us a company’s profitability from its operations including tax payments.
This contrasts with the more popular EBITDA which excludes taxes from its calculation.
To understand the benefits of EBIDA (and its shortcomings), we need to understand the costs which are excluded from its calculation.
The three types of costs excluded are: Interest, Depreciation and Amortization.
Interest refers to interest payments made against a loan or some sort of debt financing.
Depreciation and Amortization represent the portion of the value of an asset which we are expensing in the current fiscal year.
How is EBIDA calculated?
To see how EBIDA is calculated let’s take a simplified made-up Income Statement.
In this example:
- The Revenues for the year are $100,000.
- The Cost of Goods sold is $20,000.
- This gives a Gross Profit of $80,000
- Selling and General & Administration Expenses (Rent, Salaries, Marketing Expenses, etc) come $30,000
- Depreciation and Amortization Expense is $2000
- So, total Operating Expenses = $30,000 + $2000 = $32,000.
- This gives an Operating Profit of $30,000
Note that Operating Profit is the same as EBIT – Earnings before Interest and Taxes.
- Interest Expense is $1750
- This gives a Pre-Tax Profit of $46,250.
- Let’s say the company pays an effective tax of 15% which gives $6937.5 in taxes.
- Therefore, Net Profit will be: $39,312.5.
With these numbers, we can calculate EBIDA.
We know that EBIDA is Earnings before Interest, Depreciation and Amortization but after Taxes.
That means we do not ignore Taxes when we calculated EBIDA. Or said differently, we take Taxes into account when calculating EBIDA.
There are three ways to calculate EBIDA. Let’s go through these.
EBIDA Formula 1: Starting from Gross Profit
Remember that EBIDA are Earnings Before Interest, Depreciation and Amortization.
This means while calculating EBIDA we do not consider the Interest Expense and we do not consider the Depreciation & Amortization Expense.
In short, we do not subtract these expenses from Revenue while calculating EBIDA.
However, we do consider all other expenses including Cost of Goods Sold, Selling and G & A expenses and Interest Expense.
While calculating EBIDA we do subtract these from Revenue.
This gives us:
EBIDA = Gross Profit – Selling and G&A Expenses – Taxes
Note: Depreciation & Amortization and Interest are left out of this formula.
EBIDA Formula 2: Starting from Operating Profit (EBIT)
EBIT stands for Earnings Before Interest and Taxes.
This means EBIT ignores Taxes but takes Depreciation & Amortization into account.
EBIDA is the exact opposite. EBIDA ignores Depreciation & Amortization but takes Taxes into account.
This is how we get EBIDA starting from EBIT (Operating Profit):
- Take EBIT.
- Add Depreciation & Amortization to it
- Then subtract Taxes from the total.
EBIDA = EBIT + Depreciation & Amortization – Taxes
EBIDA Formula 3: Starting from Net Profit
Another way to calculate EBIDA is to start with the Net Profit and work our way upwards.
Net Profit is the Earnings that takes all expenses into account.
But we know that EBIDA does not take the Interest Expense and the Depreciation & Amortization Expense into account.
So, we add these expenses back to Net Profit to get EBIDA.
EBIDA = Net Profit + Interest + Depreciation + Amortization
Comparing EBIDA to EBITDA and EBIT
EBIDA Vs EBITDA
Since EBIDA includes tax payments in its calculation, it is a useful metric if you would like to compare two companies in the same industry but operating under different tax regimes.
For instance, if you’d like to compare a company in the United States with a comparable company in France, specifically to understand the impact of the different tax regimes that the companies operate under, comparing their EBIDAs could be a useful exercise.
However, if you’d like to ignore the tax impact because taxes are relatively out of a company’s operational control, you could use the EBITDA.
That’s because EBITDA = EBIDA – Taxes.
However, both EBIDA and EBITDA ignore the impact of long-term investments including capital expenditures (Depreciation and Amortization) and the cost of debt financing (Interest).
As a result, both EBIDA and EBITDA can be misleading if a company has large depreciable investments (so has a significant Depreciation and Amortization expense in the current fiscal year) and is heavily financed by debt (and so has a large Interest Expense).
EBIDA Vs EBIT
Sometimes, it can be risky to ignore the effects of depreciable expenditures. After all, Depreciation and Amortization can constitute a significant portion of a company’s expenses and are a reflection of the company’s ability to make sensible long-term investments.
So, if you are comparing two companies from an investment point of view, comparing their EBITs could be more useful.
For instance, if one company has made a significant investment in a factory or the purchase of land or machinery while another company has made a smaller similar investment, but both have comparable EBITs, you know that the second company is performing better or at least giving a better return on its investment. This fact might be missed if you just compare their EBIDAs or EBITDAs.
So when comparing profitability, don’t forget the impact of Depreciation and Amortization.
Weaknesses of EBIDA
EBIDA (not unlike EBITDA) can be used by companies with low Net Profit or making a Net Loss as a way of showing some form of profitability. This can make EBIDA a misleading performance metric if not reviewed carefully. This weakness also exists in the EBITDA.
This is why both EBIDA and EBITDA have to be analyzed carefully together with Capital Expenditures, Debt levels and exceptional “one-time” expenses.
Also, EBIDA is not a GAAP metric and so isn’t regulated. This means it is calculated at the discretion of the company and so should be taken with a grain of salt.
- EBIDA stands for Earnings before Interest, Depreciation and Amortization.
- EBIDA can be calculated in one of three ways:
- Starting from Gross Profitand deducting Selling & GA Expenses and Taxes EBIDA = Gross Profit – Selling & GA Expenses –Taxes
- Starting from Operating Profit (EBIT), adding Depreciation & Amortization and deducting Taxes
EBIDA = EBIT + Depreciation & Amortization – Taxes
- Starting from Net Profit and adding Interest, Depreciation & Amortization
EBIDA = Net Profit + Interest + Depreciation & Amortization
- EBIDA is not a GAAP metric, is infrequently used and can be calculated at the discretion of the company.
- EBIDA can be useful to understand the impact of a company’s tax regime on its operations and to compare two similar companies operating in different tax environments.
- Like its cousin EBITDA, EBIDA can be misleading since it ignores the impact of large depreciable investments as well as heavy debt financing.