# Meaning of EBITDA 2

### EBITDA according to the cost of sales method

You can use the cost of sales method according to Section 275 (3) HGB as follows:

If the cost of sales method is used, the following must be shown:

• Sales
• Production costs of the services provided to achieve the sales
• Gross profit on sales
• Distribution costs
• Other company income
• Other operating expenses
• Income from investments
• Income from other securities and loans from financial assets
• Other interest and similar income
• Depreciation on financial assets and on securities held as current assets
• Interest and similar expenses
• Taxes on income and earnings
• Result after taxes
• other taxes
• Annual surplus / annual shortfall

#### Simplified example for calculation

 Annual surplus / annual shortfall € 500,000 + Tax expense + € 60,000 – tax income – € 20,000 = EBT € 540,000 + Interest expenses and similar expenses € 60,000 – Interest income and similar income € 5,000 = EBIT € 595,000 + Depreciation (fixed assets) +130,000 € – write-ups (fixed assets) – € 200,000 = EBITDA € 525,000 + extraordinary expenses + € 150,000 – Extraordinary income – € 20,000 = adjusted EBITDA € 55,000

### Key figures

#### EBITDA margin

In addition to the calculation, there are other key figures such as the EBITDA margin . With this you can calculate the ratio to total sales . Taxes, interest and depreciation are left out.

The difference between the EBITDA margin and the EBIT margin is important . Because the latter still includes the depreciation. It is important for you to have the highest possible EBITDA margin , because with such a result you have comparatively low costs to keep your operational business going.

#### Calculate EBITDA margin

For the calculation you have to use your total annual turnover. Interest amounts, depreciation and taxes are not taken into account. To achieve a high target, EBITDA as a percentage of sales must also be high and your operating costs pretty low.

The formula is pretty simple:

EBITDA margin = (EBITDA / sales) x 100%

#### Enterprise Value

This is a key figure that determines your company value based on your market capitalization . To do this, you have to add your debts to your market capitalization and then subtract your cash on hand and other liquid funds. In addition, there are long and short-term debt capital as well as the equity of minorities.

The formula for this looks like this:

– Liquid funds + (interest-bearing) debt + equity (minority interests) = Enterprise Value

 Market capitalization

#### TTM EBITDA

TTM means “ Trailing Twelve Months ”. The EBITDA is not calculated during a fiscal year, but at any point in time over the last 12 consecutive months .

#### Net Debt / EBITDA (net debt ratio)

A company’s net debt-to-equity ratio is the company’s debt minus its liquid or fast-liquidating assets relative to its earnings. For the calculation, the net debt is divided by the EBITDA.

So the formula for this is:

Net debt ratio = net debt / EBITDA

## From EBITDA to free cash flow

### differences

Sometimes EBITDA is mistakenly equated with cash flow. This is wrong because depreciation, interest and taxes are not taken into account here. Interest and taxes, however, are expenses and thus expenses, which in turn belong to the cash flow. This quickly shows that you cannot use the two terms synonymously at all.

#### Company valuation based on EBITDA

Especially when selling a company, it is important to find out what the company’s value is like. The so-called multiplier method helps here.

With the multiplier method, sales prices from similar companies are used as a benchmark. The value of the comparable company is divided by a so-called profit indicator such as EBT, EBIT or EBITDA . The result is a multiplier that can be used to further calculate the key figures of the company to be valued.

### Cash flow analysis / cash flow statement

Put simply, the cash flow in your company shows you where your income is coming from and your expenses are going. This allows investors or lenders such as banks, but also shareholders, to get a good impression of your business activities. Because it shows how you do business.

You can differentiate between several types of cash flow:

• Cash flow from current business activities / operating activities
• Cash flow from investing activities
• Cash flow from financing activities

There are also other calculation options:

• The free cash flow, which is made up of the operating cash flow plus the cash flow from investing activities.
• The discounted cash flow , which is widely used in America as the discounted earnings method.
• The cash flow return on investment, as a return indicator, is a way of evaluating your operational business activities.

## EBITDA interpretation

With your EBITDA result, you can classify and evaluate your company or even an entire group economically. Above all, you can use it to compare the annual financial statements of international companies. Because depreciation and taxes are regulated differently at the international level than in Germany, these items are not taken into account. Only in this way is the result meaningful on an international level. Comparisons are particularly important for companies that are listed on the stock exchange.

## Conclusion

The key figure earnings before interest, taxes, depreciation and amortization is used everywhere today, but not only for the global comparison of large corporations, but also as a success indicator for start-up companies. After all, if you have just started your business, in most cases you will not have any major profits.

However, the company now gains a certain informative value from the EBITDA, which can represent the overall situation of the company. Unfortunately, this does not yet show whether the company will continue to be economically efficient in the future. Because that in turn depends on the investments and thus also on the cash flow.

Therefore, you should always use various key figures for a well-founded evaluation of your and other companies. And in addition to the EBITDA, also interpret the cash flow or the various cash flows. This gives you several key figures that illuminate your company from different points of view.