EBIDA is a financial term that means earnings before interest, depreciation, and amortization. It is a measure that adds these values (interest, depreciation, and amortization), including tax expenses, to the company’s net income.
However, it is lesser-known and used by financial analysts. Instead, they use its acronym EBITDA (Earnings Before Interest, Depreciation, Tax expenses, and Amortization). Let’s discuss the difference between these two terms before going towards calculation.
Comparison of EBIDA and EBITDA
Let’s look into the valuation of these two calculations. We know that EBITDA has less valuation measure as it does not include the tax expenses in the measurement of earnings. Earnings before interest, depreciation, and amortization exclude the debt payment assumption compared to EBITDA, which demonstrates the assumption. This assumption tells that the tax paid can decrease the debt amount.
Now, you must be thinking about why this assumption is made? The tax-deductible feature of interest payment allows this assumption to decrease the company’s tax expenditure further. Thus, it can provide more money for the debt service. At the same time, EBIDA doesn’t make the assumption of low tax expenditure via interest expense. Therefore, it doesn’t include the tax expense during the calculation of earnings before interest, depreciation, and amortization.
How to Calculate EBIDA?
To calculate the earnings before interest, depreciation, and amortization, we need a formula that covers each value necessary for it. A general formula is used for its calculation which is as follows;
EBIDA = EBIT + Depreciation + Amortization – Taxes
In this formula, different terms describe different expanses made in a business. For your convenience, we will explain these terms one by one.
EBIT: It serves as an indicator of the company’s profitability and is calculated by adding interest and tax expenses to the net income. Earnings before interest and taxes are also referred to as operating profit, profit before interest and taxes, and operating earnings.
Depreciation is a method used to devote the asset’s cost over its life expectancy by how much its value has been used. It combines the asset’s price and the benefit of its use. Assets include machinery or equipment used in the whole procedure.
Amortization: It is a process that includes writing about the loan or valuable assets. Its primary focus is to spread the payments over time. Lenders use it to demonstrate the schedule of loan payments.
Now, let’s take an example to calculate the EBIDA for XYZ company.
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| Income Statement For the Year 2021 |
| Sales Revenue | $5,000,00 |
| Salaries | 50,000 |
| Rent and Utilities | 50,000 |
| Depreciation | 25,000 |
| Operating Profit | $ 3,75000 |
| Interest Expense | 25,000 |
| Earning Before Taxes | $ 3,50000 |
| Taxes | 1,000,00 |
However, adding depreciation and amortization will result in EBITDA. To make it EBIDA, we’ll subtract the taxes from it.
EBIDA = $3,75000 + $ 25000 + 0 – $50,000 = $3,50000
Thus, we can calculate the earnings before interest, depreciation, and amortization. But financial analysts did not commonly use it.. They only use EBITDA because EBIDA is always higher than the net income.