An easy way to calculate EBITDA is to use EBIT (also known as operating profit) and add

depreciation and amortization charges back to it to get EBITDA. Here is the chain of all
profitability numbers:

Gross Profit – support costs or indirect costs such as admin, sales, etc = EBITDA
EBITDA – Depreciation & Amortization costs = EBIT or operating profit
Operating profit – Interest = EBT (earnings before taxes)
EBT – Taxes = Net Profit
Net profit – dividends = Retained earning

Note: Earnings and Profits are used interchangeably almost all the time.

Example of EBITDA:Aegis Logistics, Income statement from 2007 to 2009

The data is taken from moneycontrol. We have sanitized the data to avoid unnecessary clutterand
to ensure clear message goes to the audience with regards to EBITDA.
Year (Rs in Crore) Mar ’07 Mar ’08 Mar ’09
Total Income 244.18 375.8 366.81
Total Expenses 206.85 312.61 314.58
Operating profit 31.49 61.27 47.09
PBDIT 37.33 63.19 52.23
Interest 5.85 4.12 6.18
PBDT 31.48 59.07 46.05
Depreciation 3.81 8.96 9.17
Profit Before Tax 27.67 50.11 36.88
PBT (Post Extra-ordinary Items) 28.15 50.48 36.64
Tax 4.55 11.38 6.27
Reported Net Profit 23.59 39.09 30.37

Look at the number in bold and with grey background. PBDIT (Profit before depreciation,
interest, and taxes) is also known as EBITDA. Is the number good or bad? What should be the
ideal EBITDA? These are the question that vexes investors when they look at EBITDA alone.
Even if you get EBITDA margin, this will not help because equity investors will still not know
what their part in this is. EBITDA can be best used by ratios such as EBITDA/interest or
EBITDA/Debt. We have explained it in next section.

How to use EBITDA

Using EBITDA is just like using other profit measures but investors should understand the use
and meaning of EBITDA as discussed above. Few uses of EBITDA are as follows:

1.

EBITDA can be used to assess a company’s ability to pay its debt and interests. As explained
earlier, EBITDA became prominent when debt holders started demanding better analysis and
presentation of numbers to understand the company’s capability to service its debt. There are few
ratios such as EBITDA / Interest or EBITDA / Debt. Debt holders can look at this ratio and
assess the company’s ability to service its debt.

2.

Equity investors should not place much importance to EBITDA because this is not the money
they are going to receive. EBITDA makes the financials look more attractive.

Conclusion

EBITDA is a number that must be used in conjunction with interest and tax data. At the same
time, the equity investors have to understand that EBITDA is not what they can lay their claim
on. EBITDA is a good parameter to judge a company’s financial well-being from a debt holder
perspective because the debt holders can lay their claim on it.