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EBITDA (Definition) | Formula | Calculation with Example - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friends today we
are going to learn a topic that is
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basically EBITDA every stakeholder is
always interested in this particular
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timer that's called EBITDA why let's get
into this let's get into the
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nitty-gritty of the same EBITDA is
basically a measure of earning before
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paying interest and taxes arrived at by
adding back the non-cash expenditures
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which are your depreciation and
amortization so this is what you can see
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over here but let's understand this in a
complete detail form num EBITDA is
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basically a measure of owning which is
before paying your interest taxes okay
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I'll just write over here I and T sounds
much better arrived at after adding back
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any depreciation you have to add back
any depreciation and you have to add
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back any amortization because those are
the non-cash expenditure and is widely
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utilized as a measure of her company's
operating performances so there are
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certain drawback as well to this measure
and looking at it in isolation can give
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a less accurate idea of the company's
actual earning then would be desired
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so princess is a graph over here
alphabet EBITDA that is Google's EBITDA
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has increased over the last 10 years
this is the year and over here this is
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the EBITDA
what you can see from the above graph
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that we know that google EBITDA has
increased 274% from it started
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from 8.3 billion 8.13 billion in 2008 close
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enough to and it has reached to $30.42 billion dollars in 2016
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look at the increase now that we
understand that what EBITDA we can
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look at the methods for calculating the
EBITDA let's start on this particular
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note the first and foremost thing that
we are going to go through is the
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formula so the EBITDA formula goes
something like this a beta is equal to
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you're operating profit
once you have the operating profit what
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you can do you can add back you have to
basically add any depreciation because
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that's a non-cash expenditure then you
have to add amortization on this
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once you add back amortization what you
get is a EBITDA so this is the first
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formula and here it would be useful to
get an idea on the financial terms we
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are using it to be able to understand
earning before interest tax depreciation
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and amortization and it's calculation
better it essentially refers to the
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profit basically that is earned from the
company's core operations that is we all
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know that's known as EBIT right that
is earning before interest and tax which
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gives a fair idea of a company's ability
to generate profits while removing any
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earnings other than those from the core
operations like for instance a company
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might might be earning from its
investments from you can save from
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investments and from the sale of the
asset as well but this types of earnings
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are excluded from the operating profit
now let's see how this thing is being
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calculated
I'll take an example over here for the
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for the same so that you have some idea
operating profit or EBIT let's see how
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it is calculated first operating profit
that is the earning before interest and
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tax that is EBIT is basically equal to
what your revenue less any expenses
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right so let us suppose that a companies
has report a company has reported a
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sales sales are revenue of let's say 30
million for a certain fiscal year and
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the operating expense amounted to let's
say 12 million so here the company's
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operating profit that is the EBIT is
going to be how much as simple as that
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30 -12 that is your 18 is your a
EBIT so here the company's a EBIT is 18
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million these expenses includes
basically depreciation amortization
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salaries in utilities cost of goods sold
along with the general administrative
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expenses right so let's understand the
next term depreciation in this because
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we are in a flow so let's understand
that depreciation depreciation is
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basically the cost of the company's
assets which is allocated over its
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duration of useful life this includes
any tangible assets like building
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machines equipments and so on and so
forth
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know
let's suppose that a company has
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purchase because you're taking example
over here of depreciation that suppose a
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company has purchased some assets with a worth of lifetime of 10 years let's say
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this the life is 10 years I'm just
adding L over here
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if the tangible assets lets its
machinery which is costing the cost of
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the machinery is let's say 6 million
right so then we can calculate the yearly
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depreciation expenses by dividing the
total cost divided by the number of
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years that is the life of the asset
which gives us 6,00,000 as the annual
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depreciation expenses the same goes with amortization it only differs from
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the depreciation in that it is a
location of companies intangible assets
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so when we talk about depreciation it is
for tangible assets and when we talk
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about amortization we are talking about
intangible assets as simple as that this
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intangible assets include intellectual
rights goodwill and so on and so forth
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suppose let's say the company intangible
assets is the same take it this way 6
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million and 10 years again the answer
is going to be 6,00,000 right so this is
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the only difference let's take one
example on the above formula that we
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have learned to calculate the EBITDA to
calculate the EBITDA how it would be
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important to note that earnings interest
interest and taxes of the form are
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reported on the income statement whereas the depreciation and amortization
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figures can be found in the cash flow
statement or in the profit and loss
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account now we have already calculated EBIT in our example let's take this one
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step further and let's assume that the
operating profit of the firm over here
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is let's say 18 million and let's say
the depreciation cost I'll just copy
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this thing down over here if it is let's
say 18 million and we have depreciation
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let's say as 6 let's say 6,00,000 so
I'll just write 0.6 and the amortization
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expense let's say it is $450,000
$450,000 million then
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the EBITDA an be calculated in the
following fashion
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EBITDA is basically
$18,000,000 plus you need to add
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back depreciation plus your amortization
so that's your $19,050,000
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now after learning the
formula let's understand how this EBITDA
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can be manipulated this is very
important
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see can EBITDA be manipulated to show the inflated earnings see as we have already
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hinted about like you know in in our
case different methods of calculating a
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EBITDA have created a lack of clarity
among investors about the reliability
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and the credibility of the metric so it
is the evident it is evident from the
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illustration that we have learned that
simply by defining operational profit
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and income differently and including or
excluding income from the non core
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operations it would be possible to
arrive at drastically varying figures of
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EBITDA based on this we can make our
final conclusion that on our analysis we
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can easily understand that EBITDA may
not be the most reliable metric for the
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measuring operating profit or
profitability especially if if it is
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used in isolation however if it is used
with a little care it could well be used
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to evaluate the corporate profitability
when used along with the other reliable
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data and figures and it allows for
different firms to be compared for the
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debt repayment capability as well so the
ability of to so ability to service the
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debt is the important is the most
important component for the survival and
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group of growth of any business and the
net debt net I will decide for you net
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debt to EBITDA the ratio can be pretty
useful in measuring disability so having
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said that one must keep in mind that
shortcomings of earning before interest
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tax depreciation and amortization while
making use of it one of the primary
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issues being that is not accurate
indicator of the operating cash flows of
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any company so this is because it does
not take into account any changes in
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working capital this is really crucial
which is the key determinant in the
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context of the operating cash flow for a
firm and another concern as we have
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already discussed in the beginning of
the tutorial is about EBITDA being
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earned non-gaap it's a non-gaap metric
makes it suspect able to be manner to
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manipulations by companies in a bit to
show higher profitability then there is
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so if there is a limitation if if this
limitations are kept in mind there is no
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reasons why learning before interest tax
depreciation and amortisation cannot be
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used by analysts as the additional tool
of evaluating and comparing the
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profitability of the of the form along
with studying and comparing the ability
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to service debt so that's it for this
particular topic if you have learned and
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