What is earnings before interest, taxes, depreciation and exceptional items?
Earnings before interest, taxes, depreciation and exceptional items (EBITAE) is an accounting measure often used to deduct amortization of intangible assets in order to obtain value. Depreciation refers to the spread of payments over several periods, and companies will use EBITAE not only as a measure of performance, but also to determine interest coverage capabilities. Items eliminated are often viewed as factors that distort the profits from the underlying business operations of a company.
Understand earnings before interest, taxes, depreciation and exceptional items (EBITAE)
Earnings before interest, taxes, depreciation, amortization and exceptional items (EBITAE) is calculated as revenue less expenses with expenses excluding interest, taxes, amortization of intangible assets and exceptional items.
When evaluating EBITAE, investors will look at the figure as a percentage of revenue and also measure the EBITAE margin. The percentage and margin will be compared to figures from previous years to assess performance. This ratio is very similar to EBITDA, a very popular performance measure often used by investors to help determine the overall financial health of a business. EBITDA was first used in the 1980s and is a measure not regulated by generally accepted accounting principles (GAAP).
GAAP refers to a common set of accounting principles, standards and procedures that companies must follow when preparing their financial statements. GAAP is a combination of authoritative standards established by policy boards and commonly accepted methods of recording and reporting accounting information. GAAP improves the clarity and communication of financial information.
EBITAE versus EBITDAE
Earnings before interest, taxes, depreciation, amortization and exceptionals, or EBITDAE, is also an accounting measure of a company’s operational performance, but is calculated differently from EBITAE and includes depreciation in the equation.
EBITDAE is calculated by taking earnings before interest and taxes plus depreciation and amortization plus exceptional items. Essentially, this formula provides a way to assess a company’s performance without having to take into account funding decisions, accounting decisions, unusual events, or tax environments. EBITDAE can easily be derived from the company’s income statement and balance sheet.
Examining EBITDAE allows analysts to focus on the outcome of operational decisions while excluding most of the impacts of non-operational decisions. Such an analysis is particularly important when comparing similar companies in the same industry.
EBITDAE is also not regulated by GAAP, so investors are at the discretion of the company to decide what is and is not included in the calculation from period to period. Therefore, when analyzing the EBITDAE of a company, it is best to do it in conjunction with other factors such as capital expenses, changes in working capital requirements, payments of debts as well as exceptional items.