EBITA vs EBITDA: Valuing Your Business

If you’re looking to value your business, you’re likely considering many factors. One important aspect is understanding the difference between financial metrics like EBITDA and EBITA. If this is your first encounter with these terms, we’ll clarify their meanings and explain how each one impacts the valuation of your company.

EBITDA and EBITA Explained

Both EBITDA and EBITA refer to earnings measurements that can give insight into a company’s operational strength and profitability without considering tax environments and financing decisions. Understandably, this can get a bit technical, so let’s simplify and explain.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric measures a company's operating performance. Essentially, it's a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, or tax environments.

To calculate EBITDA, you start with net income and then add back interest, taxes, depreciation, and amortization. In this calculation, depreciation and amortization are considered non-cash expenses, as they do not involve actual cash outflow.

What Is EBITA?

EBITA, on the other hand, stands for Earnings Before Interest, Taxes, and Amortization. Unlike EBITDA, EBITA does not add back depreciation. This is because it considers the tangible assets that depreciate over time and directly affect the ongoing maintenance costs of those assets. It offers a deeper insight into the ongoing costs of running the business. Basically, EBITDA might be more suitable for businesses with low maintenance and depreciation expenses, while EBITA could be more applicable for businesses with substantial hard assets and related depreciation costs.

The calculation of EBITA is similar to EBITDA. Start with net income, add back interest and taxes, but only add back amortization, not depreciation.

Amortization in EBITDA

Amortization within the framework of EBITDA refers to the gradual reduction of debt over a designated period, as well as the process of allocating the cost of an intangible asset over its useful life. Understanding amortization in the context of EBITDA is crucial, as it helps assess a business's true profitability by incorporating these costs.

The effects of amortization on business valuation can be significant. A more complete view of a company's profitability is presented by including amortization in EBITDA. This is particularly important since amortization accounts for the expenses associated with intangible assets, such as patents and trademarks, which can influence overall financial performance.

Choosing the Right Metric for Business Valuation

EBITDA is often used as a valuation tool because it offers a clean look at the operational aspects of a business. However, you’ll also need to consider factors such as the nature of your assets, your industry, and the company's lifecycle stage.

EBITA, meanwhile, helps to focus more on a business's tangible costs, making it a good choice for companies with considerable depreciation costs. However, it's necessary to consider your business structure and asset base before opting for EBITA as your valuation measure.

Another way to think about EBITA is as EBITDA minus capital expenditures (CapEx). This difference is particularly relevant for businesses with significant annual equipment costs, such as site work contractors, as these businesses are more likely to be valued based on EBITA. CapEx accounts for the funds needed to purchase or upgrade physical assets, which can be a major factor in valuing asset-heavy companies. By focusing on EBITA, business owners in industries with high equipment costs can gain a clearer picture of operational cash flow while accounting for necessary ongoing expenditures.

Purpose Equity's Sell-Side Advisory Services

Purpose Equity's sell-side advisory services can guide you through the process of business valuation, helping you determine whether EBITDA or EBITA is the more suitable metric for your business. We offer extensive industry knowledge and experience to ensure you get the most accurate valuation.

Contact Purpose Equity for Help Valuing Your Business

Any business owner looking to value their company needs to understand the difference between EBITA and EBITDA. Both are useful tools, but the choice between them depends on the nature of your business.

We strongly encourage business owners to seek professional advisory services for accurate valuation. Purpose Equity's team of experts is here to guide you through the intricacies of business valuation. For a more detailed discussion about EBITDA and EBITA or any other aspects of business valuation, get in touch with us through our contact page.

Image Source: bangoland/Shutterstock