EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and is a financial metric widely used in business analysis. It provides a picture of a company’s profitability by excluding certain non-operating expenses.
Understanding EBITDA is helpful for many stakeholders, like investors, business owners, and, of course, lenders.
Read this guide for more information on:
- EBITDA meaning.
- How to calculate EBITDA.
- EBITDA vs net income.
- EBITDA example.
Why is EBITDA Important?
EBITDA provides a snapshot of a company’s profitability from its core operations without taking into account non-operating and non-cash expenses. It’s important because it helps stakeholders assess a company’s ability to generate income solely from its operations.
By excluding interest, taxes, depreciation, and amortization, EBITDA provides a representation of a company’s operational efficiency and profitability.
Company owners can also use EBITDA for financial planning and monitoring debt repayments.
How to Calculate EBITDA
To calculate EBITDA, start with a company’s net income or operating income and add back interest, taxes, depreciation, and amortization expenses.
The formula for calculating EBITDA is as follows:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA example
Let’s say company “ABC” reported the following:
- Net income of $1 million
- Interest expenses of $200,000
- Tax expenses of $300,000
- Depreciation expenses of $150,000
- Amortization expenses of $50,000.
Using the formula mentioned earlier, we can calculate EBITDA as follows:
EBITDA = $1,000,000 + $200,000 + $300,000 + $150,000 + $50,000 = $1,700,000
Understanding the Meaning Behind the Numbers
While EBITDA provides some insight into a company’s operational efficiency, it should not be viewed as a standalone metric. It is essential to analyze EBITDA in conjunction with other financial indicators, such as net income, cash flow, and revenue growth.
A high EBITDA figure indicates that a company is generating strong operational profits, while a low EBITDA may suggest inefficiencies or a challenging industry environment.
EBITDA vs. Net Income
EBITDA and net income are two financial metrics that provide different perspectives on a company’s profitability. Net income represents the bottom line after accounting for all expenses, including interest, taxes, depreciation, and amortization. On the other hand, EBITDA focuses solely on operational profitability by excluding these expenses.
Most experts say that although EBITDA is a fair indicator of a company’s performance, net income offers a more comprehensive view of a business’s profitability.
Strategies for Businesses to Increase EBITDA
A strong EBITDA figure can improve a company’s creditworthiness, making it easier to secure funding. Some lenders and investors often consider EBITDA as a key indicator of a company’s ability to generate profits and repay debt.
Improving Operational Efficiency
By identifying and addressing inefficiencies in their operations, businesses can increase their EBITDA. This can be achieved through internal audits, better inventory management, process optimization, cost reduction initiatives, and technology adoption.
Enhancing Revenue Streams
Increasing revenue can directly impact EBITDA. Businesses can achieve this by expanding their customer base, introducing new products or services, or entering new markets. By diversifying revenue streams, businesses can generate more substantial EBITDA figures.
Is EBITDA Recognized by GAAP?
EBITDA isn’t on some business income statements because it’s not recognized by the Generally Accepted Accounting Principles (GAAP). This is primarily because it does not match expenses with revenues.
There is also a criticism that EBITDA can artificially make companies look better, especially if they have borrowed huge sums of money and are facing increasing capital and development costs.
Ultimately, the significance of EBITDA can vary from industry to industry. In capital-intensive industries such as manufacturing or infrastructure, the metric can be more relevant. However, in service-based industries, it may be less relevant.
Financing Options for New Startups and Small Businesses in Canada
EBITDA isn’t particularly relevant for new startups and small businesses. Such businesses will need to satisfy one or more of the following metrics to qualify for funding and increase their business capital:
- Business credit score.
- Personal credit score.
- Collateral.
- Bank statements.
- Balance sheet.
- Annual revenue.
- Business cash flow.
- And more.
Let’s explore some of the popular financing options for startups and small businesses in Canada:
Online Small Business Loans
Online small business loans provide a convenient and accessible financing option for startups and small businesses in Canada. You can apply for such a loan with Levr.ai. We have streamlined the application process and only work with certified lenders for online small business loans in Canada.
Business Credit Cards
With businesses no longer able to apply for the CEBA loan, business credit cards can be handy in an emergency. Companies can purchase essential supplies, equipment, and services with them when cash is tight.
MCA Loans
Merchant Cash Advance (MCA) loans are a financing option that provides immediate cash flow for businesses in exchange for a portion of future sales. MCA loans are particularly suitable for businesses with a steady stream of credit card sales, such as retail stores or restaurants.
Business Equipment Loans
If your company needs technology but lacks capital, consider business equipment loans. These loans are specifically designed to help businesses acquire the necessary equipment to operate and grow. These loans can be used to purchase or lease equipment, such as machinery, vehicles, or technology systems.
SRED loan
An SRED loan is a specialized financing option for technology startups in Canada. The SRED (Scientific Research and Experimental Development) program provides tax incentives for businesses engaged in research and development activities.
If your startup does not qualify for SRED and you’re wondering how to finance technology startups, here are some other options:
- Venture capital firms invest in high-potential startups in exchange for equity ownership. These investments provide capital for growth and often come with the added benefit of strategic guidance and industry connections.
- Angel investors are high-net-worth individuals who provide capital to startups in exchange for equity. These investors can offer valuable expertise and mentorship in addition to financial support.
- Crowdfunding platforms allow startups to raise capital from a large number of individuals who contribute small amounts. This approach can help validate the business idea and create a community of early adopters.
About Levr.ai
If your company is interested in new business loans in Canada, work with us to find the right solution. Levr.ai is an intelligent small business loans platform built to get your business funded—fast. Levr.ai Increases your chances of approval with our unique compatibility system that’ll match you with the lender that’s right for you. Our goal is to break down barriers and make loans accessible to businesses of all sizes.
