What Is EBIDA? A Simple Guide to Earnings Before Interest, Depreciation, and Amortization

If you’re trying to understand how well a company is doing, you might come across a term called EBIDA. This term stands for Earnings Before Interest, Depreciation, and Amortization. It may sound complicated, but don’t worry! We’re here to break it down in simple terms.

By the end of this article, you’ll understand what EBIDA is, why it’s important, and how to use it to look at companies.

What Is EBIDA?

EBIDA is a number that helps you understand how much money a company makes from its main business activities, without considering some other expenses like interest, depreciation, and amortization. Let’s look at what these words mean in simple terms:

• Interest: This is the money a company has to pay when it borrows money, like paying interest on a loan.
• Depreciation: This is the cost of a company’s physical assets, like machinery or buildings, losing value over time.
• Amortization: This is similar to depreciation, but it applies to intangible assets, like patents or trademarks, losing value over time.

When we look at EBIDA, we ignore these costs because they don’t directly show how well a company is making money from its regular business activities. We just want to see how much cash the company is generating from what it does every day.

Why Is EBIDA Important?

EBIDA is useful for understanding a company’s ability to make money from its core operations, which means the business activities it focuses on every day. It’s helpful because it removes things that can confuse the picture, like taxes or the way the company finances its operations.

Here’s why EBIDA is important:

• Shows How Much Cash the Company Makes: It tells you how much money a company is making from its main business, ignoring things like taxes and how much it’s paying for assets or borrowing money.
• Easier to Compare Companies: If you’re comparing companies in the same industry, EBIDA helps you make a fair comparison. Some companies might have a lot of debt or expensive assets, but EBIDA removes these differences so you can look only at their core business performance.
• Helps Understand Real Profits: In India, taxes can vary a lot. By ignoring taxes, EBIDA gives a clearer picture of how a company is actually performing, no matter how much it has to pay in taxes.

How to Calculate EBIDA

The formula for calculating EBIDA is quite simple. Here’s how it works:

EBIDA = Net Income + Interest + Depreciation + Amortization

Now, let’s look at an example with real numbers to make this clearer.

Example: Calculating EBIDA

Imagine a company in India has the following financial details:

Step 1: Calculate Net Income

First, we need to calculate the company’s Net Income, which is simply the money left over after all expenses are deducted from total revenue (sales).

To get the Net Income, we subtract:

• Cost of Goods Sold (COGS) (the cost of making the products),
• Selling & Administrative Expenses (the cost of running the business, like salaries and office expenses),
• Depreciation (the cost of losing value on physical assets),
• Amortization (the cost of losing value on intangible assets),
• Interest Expense (the cost of borrowing money),
• Taxes (the money the company pays to the government).

So, the Net Income is:

Net Income = Revenue – COGS – Selling & Admin Expenses – Depreciation – Amortization – Interest – Taxes

So, the Net Income is ₹2,100,000.

Step 2: Add Back Non-Cash Expenses

Now, we add back the interest, depreciation, and amortization to the Net Income to get EBIDA.

So, the EBIDA is ₹3,650,000.

EBIDA vs EBITDA: What’s the Difference?

You may also come across another term called EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. The main difference between EBIDA and EBITDA is that EBIDA does not exclude taxes, while EBITDA does.

• EBIDA looks at earnings before interest, depreciation, and amortization but includes taxes.
• EBITDA looks at earnings before interest, taxes, depreciation, and amortization.

So, EBIDA will usually be higher than EBITDA because it does not take taxes into account.

Why Should You Use EBIDA?

EBIDA is especially helpful when you want to:

• Look at a Company’s Core Performance: It helps you understand how well a company is doing just from its main business activities, without being affected by things like tax laws, interest payments, or asset costs.
• Compare Companies in the Same Industry: When comparing companies that have different levels of debt or investment in assets, EBIDA gives a clearer idea of their operational strength.
• Make Better Investment Decisions: If you’re thinking of investing in a company, EBIDA helps you see how much cash the company is really making from its core business.

Is a Higher EBIDA Better?

In general, EBIDA can give you an idea of how well a company is performing in its core business. A higher EBIDA usually means that the company is making more money from its operations. However, EBIDA alone doesn’t tell you everything about a company’s financial health.

For example, a company might have a high EBIDA but could still have problems if it has a lot of debt or needs to spend a lot on new equipment. So, while a high EBIDA is a good sign, you should also look at other factors, like the company’s debts and capital expenditures.

Conclusion

In summary, EBIDA is a useful way to understand how much money a company is making from its main business, without worrying about things like taxes, interest payments, or depreciation. It can help you compare companies more fairly, especially in industries where companies might have different levels of debt or assets.

However, EBIDA should not be used alone. It’s best to look at it alongside other financial measures like EBIT, EBITDA, and Net Income to get a full picture of a company’s financial health.

By understanding EBIDA, you’ll be able to make more informed decisions when looking at companies, especially in India, where taxes and asset investments can vary a lot.