Earnings Before Interest, Depreciation, and Amortization (EBIDA) is a financial metric that signifies a company’s profitability by adding interest, depreciation, and amortization expenses back to its net income. Unlike EBITDA, EBIDA includes tax expenses, making it a more conservative measure. However, it is less commonly used than its better-known counterpart, EBITDA.
Key Takeaways
- EBIDA adds interest, depreciation, and amortization expenses to net income.
- It is more conservative compared to EBITDA as it factors in tax expenses.
- Analysts often prefer using EBITDA or EBIT while comparing companies.
- All components needed to calculate EBIDA can be found on a company’s income statement.
An Insight into Earnings Before Interest, Depreciation, and Amortization (EBIDA)
Calculating EBIDA involves adding interest, depreciation, and amortization back to net income, or alternatively, adding depreciation and amortization to EBIT (Earnings Before Interest and Taxes) and then subtracting taxes. This metric is particularly useful for comparing companies within the same industry, as it removes the direct effect of financing choices where taxes paid are a direct result of indebtedness.
EBIDA can often serve as a crucial metric for analyzing organizations that don’t pay taxes, such as non-profit entities like hospitals, charities, and religious organizations. In such scenarios, EBIDA can be synonymous with EBITDA.
Calculating EBIDA: Step-by-Step
EBIDA is derived by adjusting EBIT (Operating Profit) with depreciation, amortization, and interest expenses. Here’s the formula:
1**EBIDA = EBIT + Depreciation + Amortization - Taxes**
Consider a company with the following financial data:
- Total Revenue: $1,000,000
- Cost of Goods Sold: $200,000
- Selling and Administrative Expenses: $150,000
- Depreciation Expense: $50,000
- Amortization Expense: $25,000
- Interest Expense: $100,000
- Taxes: $35,000
To calculate EBIDA, first compute EBIT:
- EBIT = Total Revenue - Cost of Goods Sold - Selling and Administrative Expenses - Depreciation - Amortization
- EBIT = $1,000,000 - $200,000 - $150,000 - $50,000 - $25,000 = $575,000
Next, adjust for non-cashflow items, depreciation and amortization, then add back interest expense:
- EBIDA = $575,000 + $50,000 + $25,000 - $100,000 = $550,000
Special Considerations
EBIDA is seen as a more conservative measure of valuation than EBITDA because it includes the tax expense. Unlike EBITDA, EBIDA assumes tax expenses cannot simply be redirected to pay down debt, providing a more cautious measure of earnings.
EBIDA, much like EBITDA, isn’t generally accepted or mandated by GAAP (Generally Accepted Accounting Principles), meaning its reporting isn’t standardized in financial statements.
The Criticism Around EBIDA
While EBIDA has merit, it’s seldom calculated or utilized by companies and analysts. It often fails to provide comparative consistency since it isn’t a standard measure. EBIDA can also mislead, reflecting as a higher value amidst net income and EBIT on many occasions, thereby not offering clear insights like other profitability metrics such as EBITDA.
Like EBITDA, EBIDA doesn’t include critical information such as changes to working capital or capital expenditures, contributing to broader financial analysis’ shortcomings.
Comparing EBIDA and EBITDA
Both EBIDA and EBITDA measures exclude non-cashflow charges like depreciation and amortization but differ on tax expense inclusion. EBIDA does not consider tax expenses, making it appear higher than EBITDA more often due to excluding one less corporate expense.
Practical Use of EBIDA
EBIDA helps assess a company’s profitability by excluding non-cash expenses that don’t align with when cash investments were made. This offers a clearer view of cash-generating profitability. Organizations often gauge EBIDA to obtain a practical understanding of their financial health from a cash flow perspective.
What Constitutes a ‘Good’ EBIDA?
Ideally, a positive EBIDA is essential for a company aiming to achieve sustainable positive cash flow. However, even with a positive EBIDA, it’s possible for companies to incur losses. Companies must aim at an EBIDA encouraging growth but also keep an eye on competitive benchmarks to stay relevant.
The Bottom Line
EBIDA, through the inclusion of operating profit, depreciation, amortization, and interest, offers essential insights into an organization’s profitability, set apart by its exclusion of taxes unlike EBITDA. EBIDA acts as a meaningful metric, providing clarity on cash-generative profitability by stripping away non-cash expenses strategically.
Related Terms: EBITDA, EBIT, Net Income, Depreciation, Amortization, Taxes.
