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Understanding EBITDA in Simple Terms

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

What Does It Mean?

In simple terms:
EBITDA tells you how much profit a company makes from its core business operations before deducting extra costs like loan interest, taxes, or accounting adjustments.

Why is it Useful?

  • It helps compare companies by focusing only on operational performance.
  • It removes expenses that can vary based on location, financing, or accounting rules.
  • Investors and analysts use it to see if a company is truly profitable from its main business.

Example

Imagine you own a small restaurant:

  • You sell food and drinks, making ₹10 lakh in total revenue.
  • Running costs (like ingredients, rent, and salaries) cost you ₹6 lakh.
  • So, your EBITDA = ₹10 lakh - ₹6 lakh = ₹4 lakh.

Now, things like loan interest, taxes, or depreciation on kitchen equipment are not included in EBITDA. That’s why it gives a clear picture of how well the restaurant is doing before all extra costs are considered.

How to Calculate EBITDA Percentage

Formula

EBITDA Percentage = (EBITDA / Total Revenue) × 100

Steps

  1. Determine EBITDA
    • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is calculated as:
      EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
  2. Find Total Revenue
    • This is the company's total income from sales or services before any expenses are deducted.
  3. Divide EBITDA by Total Revenue
  4. Multiply by 100 to get the percentage

Example

Imagine you own a small restaurant:

  • You sell food and drinks, making ₹10 lakh in total revenue.
  • Running costs (like ingredients, rent, and salaries) cost you ₹6 lakh.
  • So, your EBITDA = ₹10 lakh - ₹6 lakh = ₹4 lakh.

Now, things like loan interest, taxes, or depreciation on kitchen equipment are not included in EBITDA. That’s why it gives a clear picture of how well the restaurant is doing before all extra costs are considered.

EBITDA Percentage Calculation:

EBITDA Percentage = 4,00,000/10,00,000 * 100 = 40%

So, the EBITDA margin is 40%.