EBITDA

Earnings Operating and non-

operating profit

Before Before !!!

Interest Financial expenses

Tax Income tax

assets (machinery,
Depreciation gradual reduction
in value / equipment
allocating the cost
over a period of
Amortization time, of the
company’s:
intangible asset
(patents,…)
 EBITDA

 focus is on the financial outcome of the daily operations / normal business

 widely accepted indicator of performance
 good metric to evaluate profitability

 not a good metric to evaluate cash flow

 leaves out
 the cash required to fund working capital and
 the replacement of old equipment (CapEx).
used formulas:

EBITDA = net profit

+ interest
+ tax
+ depreciation
+ amortization

EBITDA = revenue
– operating costs
 EBITDA = revenue – operating costs*

GOGS operating expenses (OPEX)

(cost of goods sold)

 raw material SG&A “non-operating

 direct labor (selling, general and administrative costs) Expenses”**
 other
 SG&A (selling, general and  Lawsuit
settlement, loss
All costs directly administrative costs) on disposition of
associated with • sales, marketing, salaries, assets, obsolete
providing the growth or r&d, commissions, inventory
service to the customer charges,
advertising, rent,… restructuring
expense
All major non-production expenses incurred
not relate to the main
in running the business
activities business
= nonrecurring
operating expenses

Excluding:
 depreciation,
amortization,
* Essential things that a company must pay for in order to maintain business interest
** Adjusted EBITDA includes the removal of various of one-time, irregular and non-recurring items
EBITDA = net profit + interest + tax + depreciation + amortization

Sales
– COGS (cost of goods sold)
= Gross profit / contribution
– OPEX (operating expenses)
(Personnel, Research & Development,
Marketing, Sales, Admin, etc., other)
= EBITDA (earnings before interest taxes and amortization)
– Depreciations and Amortization
= EBIT (earnings before interest and taxes)
– Tax result (income tax)
– Financial results (interest)
= Net Profit (net income)
 EBITDA = net profit + interest + tax + depreciation + amortization

Revenues 2,000
– COGS (1,000)
= Gross profit 1,000  50% gross margin
– OPEX 400
= EBITDA * 600  30% EBITDA margin
– Depreciations (200)
= EBIT 400  20% EBIT margin
– Tax (50)
– Interest (150)
= Net Profit 200  10% profit margin

* EBITDA margin = EBITDA / revenues

application example:

a new machine: 8,500 TEuro

useful life: 10 years

depreciation: 8,500 / 10 =
850 TEuro p. year
application example:

Revenues 2,000 2,000

– COGS (1,000) (1,000)
= Gross profit 1,000 1,000
– OPEX 400 400
= EBITDA 600 600 unchanged
– Depreciations (200) +(850) (1,050)
= EBIT 400 (250) loss
– Tax (50)
– Interest (150)
= Net Profit 200
 EBITDA

 provides a better view of actual  ignores changes in

business health: working capital and
overstates cash flow
 how well its business model is
working and produces profit  can be a misleading
measure of liquidity
 only accounts for necessary expenses
for the day-to-day running of the  does not consider
business the amount of
required investment
 lets you compare how efficient a
company is against its competitors
 ways to value a company:
 using EBITDA-Multiple to derive
the enterprise value
one more…

Revenues
– COGS
= Gross profit
– OPEX
= EBITDA EBITDA
– Depreciations – Tax
= EBIT – Increase in WC (working capital)
– Tax – CapEx (investments in maintenance and growth)
– Interest = FCFF (free cash flow to the firm)*
= Net Profit

*Free Cash Flow to Firm, is the cash flow available to all funding providers (unlevered free cash flow) it represents
the surplus cash flow available to a business if it was debt free. FCFF is an important part of the DCF Model to
calculate the enterprise value.