EBITDA

How to calculate EBITDA from an IFRS income statement

Most Nordic listed companies report under IFRS, and IFRS does not require an EBITDA line. Some companies show EBITDA on the face of the income statement; others report only operating profit and a line for depreciation, amortisation and impairment. The calculation is then:

• EBITDA = operating profit (EBIT) + depreciation, amortisation and impairment
• or, working down from the bottom line: net income + income taxes + net financial expenses + depreciation, amortisation and impairment, adjusted for any items (such as discontinued operations) that sit below operating profit.

Two details change the number more than people expect. The first is impairment. A write-down of goodwill or of a plant that is being closed is a non-cash charge, so it is usually included in the add-back, but it is also a sign that an earlier investment did not pay off. The second is leases. Since IFRS 16 took effect in 2019, most lease payments are no longer an operating expense: the company depreciates a right-of-use asset and books interest on a lease liability instead. Both sit below EBITDA, so EBITDA rose at every company with large leases, such as retailers and telecom operators, without any change in the business. Compare EBITDA only on the same accounting basis.

How to read EBITDA and EBITDA margin

EBITDA in millions says little on its own. Investors usually look at it in one of four ways:

• EBITDA margin (EBITDA ÷ revenue) shows how much of each euro of sales is left before depreciation, interest and tax. Capital-heavy businesses such as telecom operators, utilities and paper mills have high EBITDA margins, because a large part of their costs is the depreciation of networks and plants. Asset-light service and retail businesses have low ones. Compare margins within an industry, not across industries; the EBITDA margin calculator does the arithmetic.
• The gap between EBITDA and operating profit is the depreciation charge. A large and growing gap means the business needs a lot of capital just to keep running.
• EV/EBITDA divides enterprise value by EBITDA. Because EBITDA is before interest, it belongs to all providers of capital, so it is paired with enterprise value (equity plus net debt), not with market capitalisation. See the EV/EBITDA calculator.
• Net debt to EBITDA is the most common leverage measure in loan agreements and in the financial targets of Nordic companies. A ratio of 3 means net debt equals three years of EBITDA.

What EBITDA does not tell you

• Depreciation is a real cost. Machines, networks and software wear out and have to be replaced. EBITDA treats that spending as if it did not exist; capital expenditure in the cash flow statement shows what the company actually spends. EBITDA minus capital expenditure is a much harder test.
• It is not cash flow. EBITDA ignores changes in working capital (inventories, receivables and payables), taxes paid and interest paid. A company can grow EBITDA while its cash flow from operations falls, for example when customers pay later or inventories build up.
• Interest and taxes are paid in cash. Two companies with the same EBITDA can end up with very different net income if one of them carries heavy debt.
• The definition is the company’s own. “Adjusted” or “comparable” EBITDA also removes items the company considers exceptional. Read the reconciliation to the reported figure; see non-GAAP and alternative performance measures.

EBITDA is most useful for comparing the operating performance of similar businesses and for judging how much debt a company can carry. It is least useful as a stand-in for profit or free cash flow.