WHAT IS EBITDA?
EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization), which is an English term, is an abbreviation of the concept of Earnings Before Interest, Depreciation and Taxes (EBITDA).
Although EBITDA is not a financial measure recognized in generally accepted accounting principles (GAAP), it is a financial indicator that is widely used in mergers or acquisitions of businesses in Turkey and allows comparison of profitability and operational efficiency between different companies.
EBITDA is the key indicator of the multiplier method, which is the valuation method of company value that we reach by multiplying the EBITDA of that company with the sector multiplier of the company .
HOW TO CALCULATE EBITDA?
EBITDA is found by adding (+) depreciation expenses (DA) to the main operating profit (EBIT) in the company’s income statement or by adding the relevant expenses shown in the formula below to the net profit for the period.
EBITDA = Net profit/loss for the period + Taxes Payable +/- Interest Expenses/Income +/- Foreign Exchange Difference Expenses/Income + Depreciation and Depreciation Expenses
EBITDA = Net income +/- Interest + Taxes + Depreciation + Amortization expenses
When calculating EBITDA, we will try to reach the operating profit by walking backwards from the Net Profit or Loss for the Period, that is, we will add expenses and subtract revenues to the net profit for the period. While doing this, it should be noted that the expenses we will add or the income we will decrease should not be related to the main activity of the company. Our aim is to eliminate income and expenses other than operational activities and focus only on the efficiency of companies’ operational transactions.
In addition, even if the income and expenses we take into account in the calculation are within the scope of operational activities, continuous, unsustainable, exceptional income and expenses should not be considered within the main activity income and expenses and should not be included in the EBITDA calculation.
Below is a summarized income statement. For ease of explanation, only operating profit/loss, net profit/loss for the period and EBITDA calculation are shown.
- A-GROSS SALES
- B-SALES DISCOUNTS(-)
- C-NET SALES
- D-COST OF SALES (-)
- E-ACTIVITY EXPENSES(-)
- F- ORDINARY INCOME AND PROFIT FROM OTHER ACTIVITIES
- G- ORDINARY EXPENSES AND LOSSES FROM OTHER ACTIVITIES (-)
- H-FINANCE EXPENSES(-)
- I-EXTRAORDINARY INCOME AND PROFIT
- J- EXTRAORDINARY EXPENSES AND DAMAGES (-)
- K- TERM PROFIT, TAX AND OTHER LEGAL LIABILITY PROVISIONS (-)
NET PROFIT OR LOSS FOR THE PERIOD
- (-) ORDINARY INCOME AND PROFIT FROM OTHER ACTIVITIES
- (+) ORDINARY EXPENSES AND LOSSES FROM OTHER ACTIVITIES
- (+)FINANCE EXPENSES
- (-) EXTRAORDINARY INCOME AND PROFIT
- (+)EXTRAORDINARY EXPENSES AND DAMAGES
- (+) PROVISIONS FOR PERIOD PROFIT, TAX AND OTHER LEGAL LIABILITIES
=EBITDA
The method we will follow when calculating EBITDA should be as follows: in the income statement; To evaluate the transactions related to the company’s main activity within the EBITDA account by examining the accounts of ordinary income and profits from other activities, ordinary expenses and losses from other activities, financial expenses, extraordinary income and profits, extraordinary expenses and losses, period profit tax and other legal liability provisions one by one. We should try to reach the profit arising from the company’s main activity more clearly by eliminating transactions that are unrelated to operational transactions from the net profit/loss for the period.
WHAT SHOULD BE CONSIDERED WHEN CALCULATING EBITDA?
For example, we need to determine whether the transactions made are related to our main activity by examining the accounts under the “F- ORDINARY INCOME AND PROFIT FROM OTHER ACTIVITIES” account one by one in the income statement. If the transaction is related to our main activity, we do not need to make a change in the net profit/loss for the period, or we need to add the relevant income and subtract the relevant expense to the operating profit or loss account. However, if the transaction is not related to our main activity, we should add it if we have subtracted it, or subtract it if we have added it, when reaching the net profit/loss for the period.
The path we will follow when we examine the following items under this account is as follows;
Dividend Income and Ebitda from Subsidiaries
Dividend income has no relationship with our main activity, so we subtract these income from the net profit and loss for the period.
Outdated Provisions and Ebitda
The issue is whether the obsolete provisions account will be excluded from the net profit for the period. This account is the income arising from the cancellation of provisions, and as long as it arises from the main activities of the company, we take it into account in the EBITDA calculation, that is, we do not need to take any action since it is already calculated in the net profit / loss for the period.
Interest Income and Expenses and Ebitda
Interest Income and Expenses In principle, interest income and expenses are eliminated when calculating EBITDA. However, if companies evaluate their cash from sales during the period from collection to payment within the working capital cycle due to their activities, until the relevant payment is made, they are taken into account in the EBITDA calculation and are not eliminated.
Exchange Difference Income and Expenses and Ebitda
Exchange Rate Difference Income and Expenses: In principle, foreign exchange difference income and expenses are eliminated when calculating EBITDA, but foreign exchange difference income and expenses arising from the main activities of companies are taken into account in the EBITDA calculation and are not eliminated. For example, exchange rate difference income and expenses arising from trade receivables and payables are included in the EBITDA calculation, but exchange rate difference income and expenses arising from foreign currency bank loans or other financing activities should not be taken into account in the EBITDA calculation.
If foreign exchange difference income and expenses arise due to an extraordinary situation in the relevant period, these income and expenses should not be taken into account in the EBITDA calculation as they are not sustainable, even if they are related to the main activity. For example, the exchange rate difference that occurs in situations such as rapid exchange rate increase or devaluation.
Maturity Difference Income and Expenses and Ebitda
Maturity Difference Income and Expenses Maturity difference income and expenses to be accrued for the sale of goods and services should be taken into account in the EBITDA calculation since they are related to the main activity of the companies. Even though maturity difference income and expenses are accounted for in other income, interest income or financing expenses accounts, they should not be eliminated when calculating EBITDA.
Rediscount Income and Expenses and Ebitda
Rediscount Income and Expenses Rediscount income and expenses are discounted to the present value of trade receivables and commercial payables with a certain discount rate. Rediscount income and expenses must be taken into account in the EBITDA calculation.
Term Tax and Deferred Tax Income/Expense and Ebitda
Term Tax and Deferred Tax Income/Expense, Term Profit Tax and Other Legal Liabilities Provisions and deferred tax income/expense should not be taken into account in the EBITDA calculation. We must add the taxes to be paid, which we subtracted when reaching the net profit/loss for the period, to the net profit/loss for the period.
Extraordinary Income and Expenses and Ebitda
Extraordinary Income and Expenses are not taken into account in the EBITDA calculation in principle, but as long as they are sustainable, they should be taken into account in the EBITDA calculation.
Severance Pay and Unused Leave Provision Expenses and Ebitda
Severance Pay and Unused Leave Provision Expenses Severance pay provision expenses are included in the EBITDA calculation within operating expenses and therefore within operating profit/loss. Therefore, there is no need to take any action, but in TFRS calculation of severance pay provision, current period service cost, past service costs and net interest on the defined net benefit liability (asset) are recognized in profit or loss. Service costs are accounted for in operating expenses, and interest expense is accounted for in financing expenses. Therefore, when calculating EBITDA, financial expenses related to severance pay should be included in the calculation, that is, added to the net profit/loss for the period.
Actuarial gains and losses are recognized in other comprehensive income, so they will not affect the profit/loss for the period and therefore the EBITDA calculation, so there is no need to take any action.