SIGNIFICANCE OF EBITA ON FIRM'S PERFORMANCE

For every organization, it is vital to calculate EBITA which means Earnings before interest, tax, and amortization because-

1)     It helps organizations know their business's operational performance, i.e., it helps assess how well a company is generating profits from its main operations before considering external factors like interest, taxes, and non-cash expenses such as amortization.

2)     It helps in the comparative analysis of different companies under the same industry or with different subunits of the same organization.

Let us understand the significance of EBITA with the help of an example

Ashiyana Group was led by its visionary CEO Mr. Harish Rai, who was known for its innovative products and visionary approach. However, behind the scenes, the financial health of Ashiyana Group was a tale of strategic decision-making and careful financial management by reviewing the metric of Earnings before Interest, Tax, and Amortization. This metric was like a financial compass guiding Ashiyana Group through the complex landscape of business performance.

 In 2024 Mr. Harish Rai decided to acquire a smaller competitor, Hamraz Group to expand their market presence after analysing the financials of the firm for 2023

Harish, decided to check the operational efficiency of a business while going for acquisition. He understood that EBITA stripped away non-operating expenses, providing a clearer picture of the core operational performance. This insight allowed Harish to evaluate the true earning potential of Hamraz Groups without being confused by interest payments, taxes, or amortization.

Harish also analyzed the historical EBITA of Hamraz Group to find that its operations are on a growth run and it would benefit them to acquire this company.

EBITA analysis of Hamraz Group helped Ashiyana Group to decide to acquire Hamraz Group. The decision proved to be financially sound, leading to increased profitability and increased market share for Ashiyana Group.

Well Being Shiksha Foundation Message

The story of Ashiyana Groups highlights the significance of EBITA in assessing a company's 

performance. In other words,  by understanding the core operational earnings, business leaders can make informed decisions that drive their companies toward sustainable growth and success in the dynamic world of business.

So, now we know how assessment of EBITA is very important for every firm as it gives insights about the earnings of the company and helps management to make various strategic decisions for sustainable growth and development.

Some Important Terms We Should Know to Asses Company's Performance

1. EBITDA=Revenue - COGS- Operating Expenses

2. EBIT=EBITDA-Depreciation -Amortization

3. EBT=EBIT- Interest

4. PAT or Net Profit=EBT-Taxes

• Revenue- is the total income generated by a business through its primary operations

• Cost of goods sold (COGS) - Total direct costs incurred producing goods or services sold by a company during a specific period

• Operating expenses- are the ongoing costs that a business incurs in its day-to-day operations excluding the costs of goods sold (COGS), such as rent, utilities, salaries, and marketing expenses.

• Depreciation -A reduction in the value of a tangible asset due to normal usage, wear and tear, new technology, or unfavorable market conditions is called depreciation

• Amortization -The process of spreading the cost of an intangible asset such as a patent, copyright, trademark, etc. over a specific period i.e. equal to the course of its useful life is called Amortization.

Pranjali Choudhary

PGDM Student, Jagannath International Management School

Edited By : Dr. Neelam Tandon