Reviewed by Oct 05, 2020| Updated on
EBITA refers to the earnings before interest, taxes, and amortisation. EBITA measures the profits of a company available for payment to its lenders, investors, funding for amortisation, and transfer to reserves. Analysts measure the EBITA of different companies within the same industry. EBITA provides a measurement of the operational efficiency of a company or increase in business activities or otherwise.
The EBITA of a company is a near accurate measure of its financial performance, whether on a quarterly, half-yearly, or annual basis. EBITA ignores the non-cash expense of depreciation while it includes amortisation. It also removes overhead costs of interest payments on debt and the annualised income tax liability. It presents a true picture of how a company is performing.
The EBITA clearly depicts the ability of a company to service its debt, provide for expansion, and add to its machinery and plant. Investors also looking for a return on investments also seek growth in operations of a company. Such a company can steadily pay dividends to investors, and also increase the dividend payments over a period of time.
EBITA is not as common in use as the EBITDA, which adds depreciation into the calculation. Depreciation is the cost of the wear and tear of assets over the useful life of the asset. Depreciation charge is as per the schedule in the Companies Act, 2013. However, the tax depreciation can vary from the depreciation as per Companies Act, 2013.
Companies, in general, need to earn to provide for replacing their assets, whether machinery or equipment. Due to wear and tear, companies need to replace assets at the end of the useful life of the asset. In the case of leased premises, a company needs to increase its scale of operations to meet the incremental cost of rent and maintenance.
Among the various benefits of EBITA, it is a clear measure of the cash flows available at the disposal of the company. The cash flows may be used to provide for the replacement of assets, service debts, and dividend payments to shareholders. At best, EBITA is an indicator of the growth in the company. A clear picture is available upon separation of capital costs and debt servicing costs of the company.