What it means
Profit measures differ in what they leave out. EBITDA strips out interest, tax, depreciation and amortisation, while EBIDA removes only interest, depreciation and amortisation and leaves tax deducted.
The result is a figure closer to the cash that is actually available after paying the tax authority. Depreciation and amortisation are accounting charges that spread the cost of assets over their useful lives.
Depreciation applies to physical assets such as machinery and vehicles, while amortisation applies to intangible assets such as software or acquired brands. They reduce reported profit but involve no cash leaving the business in that period, which is why analysts add them back to get closer to cash earnings.
Interest is excluded because it reflects how a company is financed rather than how well the business performs. Excluding it makes it fairer to compare firms with different amounts of debt.
Tax is kept in because it is a genuine cash cost that cannot be avoided, and some analysts argue that ignoring it flatters the picture. EBIDA is used less than EBITDA, so it is important to check how a company or report defines it.
Some sources treat it as a measure that includes tax, as described here, while others use the term loosely. Whenever you see an unfamiliar profit measure, look for the reconciliation to net income to see exactly what has been added back.
Like all adjusted profit measures, it is not a substitute for cash flow. It ignores the cost of replacing assets, changes in working capital and debt repayments.
Lenders and investors should use it together with cash flow statements and other ratios. The measure can be useful in negotiations over loans and company sales.
Because it starts from net income, it is easy to reconcile to the audited accounts, and each add-back can be checked against the notes. That traceability makes it harder to inflate than measures built on management's own adjustments.
In practice
Real-world examples.
Example
A lender assessing a $1,500,000 loan to a bakery uses EBIDA to see how much cash earnings are available after tax to cover repayments. If EBIDA is $450,000 a year, the bank can see that the annual repayments of $150,000 are covered three times.
Example
An analyst values a telecoms business that has large depreciation charges on its network. She uses EBIDA to see operating earnings before those non-cash charges, but after the tax the company pays. She also compares the multiple with similar firms to see whether the price looks fair.
Example
A finance manager compares two divisions with different debt levels. EBIDA allows her to measure their earnings without the effect of how each is financed. She then asks each divisional head to explain any large differences.
Formula
Calculation
EBIDA = Net income + Interest + Depreciation + Amortisation
(Tax is already deducted in net income, so it is not added back.)
Worked example: a company reports net income of $300,000 after interest, tax, depreciation and amortisation. Interest expense is $100,000, depreciation is $150,000 and amortisation is $50,000.
EBIDA = $300,000 + $100,000 + $150,000 + $50,000 = $600,000
For comparison, if tax expense was $120,000, then EBITDA would be $600,000 + $120,000 = $720,000. The $120,000 difference is the tax cost that EBIDA keeps.Case study
Seen in the real world.
Keystone Printing is a fictional company with heavy machinery and a bank loan. Its owner, Ms Lindqvist, was disappointed by net income of $180,000 and wanted to show a prospective investor the earning power of the business.
She prepared a reconciliation. Starting from net income of $180,000, she added interest of $70,000, depreciation of $210,000 and amortisation of $20,000, giving EBIDA of $480,000. She also showed that tax of $60,000 had already been paid, so the investor would see that the figure was after tax.
This illustrative case shows how EBIDA presents operating cash earnings without hiding the tax cost. The investor appreciated the clarity, and the two parties agreed a valuation based on a multiple of EBIDA, after discussing whether the heavy machinery would need replacing soon. They also agreed that a share of the sale price would be tied to future profit.
Watch out
Common mistakes.
- Adding tax back and calling the result EBIDA, which turns it into EBITDA.
- Treating EBIDA as cash flow, when it ignores capital spending, working capital and debt repayments.
- Assuming every report uses the same definition, when some sources use the term loosely. Always ask for the reconciliation to net income before relying on a number.
Questions
People also ask.
How is EBIDA different from EBITDA?
EBITDA adds back tax, while EBIDA keeps tax as a deduction.
Why add back depreciation and amortisation?
They are non-cash charges, so adding them back gets closer to the cash a business produces.
When is EBIDA useful?
It is helpful when you want a cash-like measure that still reflects the cost of tax, for example in some lending discussions.
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