What is EBITDA?

Adjusted EBITDA vs EBITDA 

Let’s start with the definition of EBITDA: Earnings Before Interest Tax Depreciation and Amortization.

This process is often used as a proxy for cash flow and is a measure of operating profit. EBITDA is a good indicator of how well the company is generating revenues and managing noncontrollable expenses because it excludes components such as interest, tax, and depreciation.

Analysts and investors often use EBITDA or EBITDA margins to quickly understand the company’s profitability trends and compare it to its peers within the same industry.

The basic calculation:

EBITDA = Earning + Interest + Taxes + Depreciation + Amortization

There are also adjusted variations to account for non-cash operating expenses or one-time irregular charges, say, for that period. Common examples are stock compensation expenses or restructuring charges. The adjusted EBITDA definition is as follows: 

Adjusted EBITDA = EBITDA + other non-cash expenses + other one-time irregular charge

Why we love EBITDA in Finance

Many may ask why EBITDA is a good measure. It tells a better story than net income or net loss.

Usually, EBITDA is higher than Net Income and is a measure of controllable profitability. The calculation does not penalize the company for investments made into the company (i.e. the cost of obtaining debt and capital expenditures) nor for noncontrollable expenses (i.e., taxes).

When used in evaluating operating cash flows, it excludes the impact of timing of collection and payments to vendors. On top of that, the adjusted EBITDA calculation also excludes non-cash operating expenses, so it is an even better indicator of operating cash flow.

How we use Planful to Report

Using Planful’s FP&A platform to automate the calculation and reporting of EBITDA is as simple as it can get.

To start, build a definition (a statistical account) to calculate EBITDA based on the actual numbers in the system. For the expenses that don’t map to specific accounts (i.e., we report restructuring charges to severance expense, rent expense, benefits, etc.), create memo accounts in which you can input the values.

With all the values in the system, you can use Planful Modeling and Spotlight to automatically report historical figures as well as forecasted figures into graphs for presentation to the board.

The neat thing about Planful is you only have to build the definition once. Then, you can incorporate EBITDA use into any report and dashboard you choose (i.e. Income Statement, Cash Flows, executive dashboards).

The data and the forecast are live, meaning you can always see where it lands in comparison to the plan in real time.

All in all, Planful gives a better understanding of where the business is operating and where we are regarding cash flow. With Planful in your toolbox, you’ll get the right numbers to your CFO in a flash — and be confident that you are delivering the most up-to-date and accurate information.