What is the depreciation in EBITDA
EBITDA and EBIT: That's the difference
Like EBIT, EBITDA is a key figure used to represent the operating result and thus the efficiency of a company and to make it comparable. As the name already suggests, EBITDA is an extension of the EBIT indicator by adding the points DA. EBITDA stands for Earnings Before Interests, Taxes, Depreciation and Amortization.
Translated from English, it means earnings before interest, taxes, depreciation and amortization. Here, D and A are both to be translated with depreciation and are therefore only shown as one word in the German version. This means, on the one hand, depreciation on property, plant and equipment and, on the other hand, on intangible assets (e.g. licenses or patents).
Where are EBIT and EBITDA used now?
The representation of the operational business of a company needs sizes in order to illustrate it and make it comparable. This is where these key figures are used. But why do you need the additional adjustment for factors D and A, i.e. the depreciation?
Since the aim is to present the performance of a company, it is important to remove as many changeable influences as possible from the presentation. Interest and taxes are only part of this. Especially in capital-intensive industries and in younger companies, high depreciation can have a major impact on the result.
High investments in the establishment of a company, the acquisition of new machinery or the acquisition of other companies lead to depreciation. These would falsify the operating result. A comparison with other companies or with previous results would therefore not give any meaningful result.
Investments are necessary to generate growth. If a company were to cut back on its investments, EBIT would increase, while EBITDA would remain the same after deducting depreciation.
EBITDA - a key figure with light and shadow
So we see: EBITDA can help to better compare the profitability of companies with high investment volumes than EBIT. However, it depends on the industry and the current situation of the company.
In the case of company takeovers, for example, if a higher value is paid for taking over the company name than the pure material value, so-called “goodwill amortization” is included.
These are real costs that also have to be written off, but in some cases the added value on the other hand is not really given. So there is no clear definition of when it is better to use EBIT or EBITDA as a key figure for assessing companies.
As with all balance sheet figures, the following also applies here: EBIT and EBITDA can help to get an impression, but one should always also take into account the respective overall situation of the company.
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