Ebitda: why do we need to know its value
What does Ebitda tell us about the economic health of a company?
Shareholders' equity, turnover, and sales revenues are some of the main items considered on a balance sheet. They provide crucial information about the company's economic and financial health and indicate its performance and results during the financial year.
Yet, there are some equally fundamental components not considered in financial statements: one of these is EBITDA. What is it? Let's find out together.
EBITDA: a performance indicator
EBITDA, an acronym for 'Earnings Before Interests, Taxes, Depreciation, and Amortisation', is a performance indicator that provides us with information about a company's core business operations. It is, in fact, an operating profitability margin, a value linked to a company's core business, and therefore tells us whether the company can generate value based on its core business without taking into account financial management, taxes, and depreciation. It is, therefore, a figure that represents the company's profit before taxes, interest, depreciation, and amortization, and thus the ability of a company not only to generate value but also to cover the costs associated with its core business. It is also a fundamental figure for comparing the company's past performance and making a comparison with competitors and the industry average.
We can calculate the EBITDA value as follows:
EBITDA differs from EBIT (an acronym for 'Earnings Before Interests and Taxes), an intermediate item in the profit and loss account that allows the assession of a company's profitability without taking into account the financial structure. It is an operating margin discounted by depreciation and amortization but before taxes and finance charges.
How to find it from the balance sheet
As we already stated, this is a fundamental indicator for understanding a company's efficiency in its core business management. But why then does this figure not appear on the balance sheet?
The answer is not trivial: the civil code does not require EBITDA to be present in the civil balance sheet. It is necessary to reclassify the income statement to obtain EBITDA. The profit and loss account's reclassification is fundamental to gain additional information to add to the information already present on costs and revenues for the year. This practice serves mainly to facilitate the information's understanding in the balance sheet, provide more detail on the company's performance and facilitate comparison with previous years' performances. There are three types of reclassification:
1. Reclassification of cost of sales and revenues to highlight relevant parameters such as gross profit;
2. Reclassification to value-added, which provides more information on a company's ability to create wealth through its core business;
3. Reclassification contribution's margin allows us to assess how many changes in sales volumes or turnover affect a company's income.
EBIT and EBITDA in Italian are known as MON (net operating margin) and MOL (gross operating profit). After the reclassification to value-added, to obtain these values within the profit and loss account, it will be necessary to derive the MON through the following formula:
If we add depreciation to MON, then we will obtain the MOL. EBITDA, in particular, is obtained by subtracting provisions from MOL.
On s-peek, you will find the reclassified balance sheets of the companies you are interested in, and to find out the EBITDA and EBIT value, you have to search for the items MOL and MON in the income statement section.
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