What Is EBITA and How Do I Calculate It?

EBITA
5
min read
September 7, 2022

Owning a business is all about metrics, budgets, and planning. Even the best parts of owning a company, like marketing, ad campaigns, or earning more customer loyalty, are still about the numbers. One metric that will tell you the full story of how profitable you are is earnings before interest, taxes and amortization, or EBITA for short. 

But why, exactly, is this number so useful? And how do you calculate it? We’ll go over all that and more, so keep reading!

What is EBITA and Why Use It?

EBITA stands for earnings before interest, taxes and amortization and it gives you a more accurate view of your company’s performance over time. Why is that? Well, interest and taxes can change over the years with new policies coming into play, so factoring those things into your profitability may skew numbers. EBITA, however, allows you to see if your operations have been turning a profit year over year. It’s one way to see how efficient you are.

Your accounting team will likely apply EBITA to the last twelve months of business to represent the total number of earnings before adjustments. However, this metric can be measured over any given period (such as over a quarter, year, month, etc.). 

Here are some other top reasons businesses might use EBITA:

A Word of Caution

This is a non-GAAP metric, meaning that it’s not typically used within accounting principles, nor is it recognized by the international financial reporting standards (IFRS). Why? If a company uses shady accounting practices to drive up earnings, it can look as though a company is doing great when it’s really not. And, when the truth comes out, investors could be in a tough spot.

Even though it does offer incredible insight into your total cash flow for the period you’ve set, like all metrics, it should be used in tandem with others.

How Do You Get EBITA? The Formula Explained

To get this metric, you’ll need to gather financial statements like your income and cash flow statements within the time you’d like to review them. 

The easiest formula to use is:

EBITA = Net Income + Interest + Taxes + Amortization

But wait, why are there plus signs in the formula when we’re supposed to be taking interest, taxes and amortization out? 

Well, it may seem counterintuitive, but in order to see your company’s earnings as if you weren’t paying taxes, interest or amortization, you’ll have to add those things back in. Why is that? Because the formula starts with a company’s net income, which takes out all of your expenses (including interest, taxes, etc.). Some people refer to this formula as the indirect method.


You can also calculate EBITA with this formula:

EBITA = Operating Profit + Amortization

In this method, you find your operating profit by subtracting your operating expenses from your gross profit. This method only takes out amortization, so you’ll have to add it back in to see what your profitability would be without it taken out of your income.

Which Formula Should You Use?

Both formulas are a straightforward way to calculate this metric because everything you need is listed on your income statement. They should both equal the same value. 

Example of Calculating EBITA

Imagine you’re a business that wants to know how well it performed last year. 

You made $100 million in revenue, but your cost of goods sold (COGS), or how much it takes to make the product plus the labor involved, amounted to $40 million. Your overhead was $20 million. Amortization expenses added up to $10 million, which leaves your operating profit at $30 million. 

Your interest added up to $5 million, which leaves your earnings before taxes at $25 million. Add in $4 million in taxes, and that leaves your net income at $21 million. 

EBITA = Net Income + Interest + Taxes + Amortization

= $21 million +$5 million + $4 million $10 million

= $40 million

EBITA = Operating Profit + Amortization

= $30 million + $10 million

= $40 million

What’s a Good EBITA?

When the calculations are completed, you'll get a positive or negative value. But which one is better? Well, this one will seem intuitive, but let’s dive in a little deeper!

Negative Value

A negative value would represent a business that has difficulties operating at a profit. If you have a negative net income or operating profit to start with, you might hope that adding back in all those taxes, interest and amortization you deducted initially might get you up to a positive value. 

If it doesn’t, then you can gather that it’s not just the burden of taxes, interest or amortization that is causing you to lose out on profits–it’s something in your company’s operations. That can be a good impetus for changing up how you do things, whether it’s in production or sales. 

Positive Value

A positive outcome would convey an efficient corporate finance strategy, so great work! The higher your EBITA, the lower your operating expenses are compared to your overall revenue. This means you’re making more than you’re spending before taxes and interest are added back in. 

EBITA vs. EBITDA vs. EBIT

You may come across another acronym called EBITDA (earnings before interest, taxes, depreciation, and amortization), which takes out depreciation from your earnings too. Depreciation is the cost of a tangible asset over time. 

In a business where investments lose their value over time, like a used car company, EBITDA is an important metric to use. That’s because depreciation can take out a larger chunk of a car company’s income, so to get a better view of their cash flow, they’ll need to ignore depreciation for a moment. Also, companies that use a lot of equipment, like manufacturing companies or utilities, would also want to consider using EBITDA since that equipment depreciates over time.

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

In the same vein, EBIT (earnings before interest and taxes) doesn’t take out amortization or depreciation. It’s a good calculation for businesses that have smaller expenses and investments, like a consulting company.

EBIT = Net Income + Interest + Taxes

All three types provide a view of a company’s profit or how much they make doing business. 

EBITA Margin 

It’s always a good practice to calculate other numbers to figure out just exactly how profitable you are. One way to do that is by finding your company’s EBITA margin. 

The margin is calculated when you divide the value with another value, like revenue:

EBITA Margin = EBITA/Revenue 

Most S&P-500-listen businesses have a margin of 11-14%, so we recommend shooting for 10% or higher if you can.

EBITA Gives You a True Look at the Profitability of a Company

If you’re trying to figure out how profitable your business is or whether you should invest in a company, consider using EBITA (or some other variation of it).

Other metrics, like a company’s net profit, only tell part of the story since they factor in expenses your business can’t control and vary depending on economic and political changes. 

EBITA is an easy way to compare cash flow from one quarter to another. And now that you know all there is to know about this metric, all that’s left to do? Get out that income statement and calculator, and go for it!

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