Topic: General Posts

Subject: Accounting question re calculation of EBITDA
Steven Swagel
Member: 2001
Posts:2
Submitted on 06-04-15 6:42 pm
Message:
Hi,
Can I get some help on this question regarding the proper calculation of EBITA:

Assuming the P&L is structured like this:

Revenue
COGS
-----------
Gross Profit
G&A
Depreciation & amortization
Interest income & expense
Other income & expense
Tax
-----------
Net income

Would EBITDA be: Gross profit - G&A
Meaning it can also be calculated as: Net income + Depreciation + Amortization + Interest + Other income & expense (ie you addback deprecation, amortization, interest AND other income/expense)

The reason I'm asking this is that I'm consulting for a company and saw that they calculated EBITDA by adding back only deprecation, amortization and interest. They didn't add back other income/expense, which to me seems wrong. Doing it that way means that other income/expense doesn't get included anywhere (ie not in EBITDA, EBIT or even EBT).

Hope my question makes sense. Thanks for your help.

Steven
 
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Replies
Bill Morton
Member: 2012
Posts: 3

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-05-15 8:12 am.
Message:
I believe you need to look at the components of Other Income before deciding. If they are generally recurring items than I would include them in EBITA. If they are very unusual then I would exclude the item or items.
 
Greg Bokman
Member: 2012
Posts: 1

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-08-15 2:47 pm.
Message:
Steven,
I agree with Bill. If other income/expenses are regular and recurring then you should include them in EBITDA, although I would be clear about (footnotes or otherwise) what is included and what is excluded.
Greg
 
Jake Feldman
Member: 2006
Posts: 15

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-08-15 11:58 pm.
Message:
I respectfully disagree -- as used in textbooks and databases, it does not exclude other income/expense. However, that's why companies will often present Adjusted EBITDA or Adjusted Net Income, so they can present (manipulate :)) the earnings the way they desire.
 
Jeff Spencer
Member: 2002
Posts: 2

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-09-15 12:35 pm.
Message:
Do they have EBITDA covenants in any credit agreement? If so, the credit agreement would likely have a definition of the term that must be followed for purposes of covenant compliance.
 
Chris Stewart
Member: 2015
Posts: 1

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-11-15 1:47 pm.
Message:
My background has always been in healthcare and for us the definition of EBITDA is Earnings Before Income Taxes, Depreciation, and Amoritization. Basically the formula includes all normal operating expenses both direct and indirect that result in operations of the business, even "other" expenses. Income taxes and Depreciation / Amortization don't necessarily flow straight line and can result in differences in period operating expenses. This is a simplistic answer but hope it helps.
 
Paul Williams
Member: 2011
Posts: 2

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-14-15 3:44 pm.
Message:
I am not aware of any binding definition of EBITDA and it is not referred to in IFRS. Since it is primarily a valuation measure it has to be consistent with its intended use e.g. if multiples are being applied to it, what is the definition used to arrive at those multiples. For internal uses, often the only definition that I ever use is the one in my banking documents.
Paul
 
Gustavo Subiela
Member: 2012
Posts: 2

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-17-15 9:35 am.
Message:
Other income/expense may be included depending on how you define EBITDA and for what purpose
Other income/expense may be recurring and expected to continue going forward
In that case I would keep it (e.g., if you are trying to sell the business and potential buyers are looking at EBITDA for valuation purposes)
 
Srini Seshan
Member: 2015
Posts: 3

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 06-27-15 1:32 pm.
Message:
Except for items that come under the cateogry of "Comprehensive income" viz unrealized holding gain or loss from available for sale securities and foreign currency trasaction gains or losses, all other income expense should be part of the Earnings after Tax. Consequently, EBITDA should have everything except Interest,Tax,Depreciation and Amortization.

Comprehensive Income is the only item that is not part of the Income statement and is directly shown under "Shareholders Equity" section in the Balance Sheet.

-Srini
 
Tim Glackin
Member: 2013
Posts: 3

Subject: Re:Accounting question re calculation of EBITDA

Submitted on 07-07-15 8:01 pm.
Message:
EBITDA generally excludes only the items stated: interest, taxes(related to income), depreciation and amortization. Normalized EBITDA will also exclude one-time and non recurring items. Normalized EBITDA is generally the basis for WACC/DCF valuations. Other income and expenses would normally be included in EBITDA.

Some debt agreements may allow for calculations of EBITDA that differ from the definitions mentioned above (for example, tax distributions to members in an LLC would be excluded) .
 
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