Guide to EBIDA: What It Is, How It Works & How It's Used

By Lauren Ward · May 22, 2024 · 6 minute read

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Guide to EBIDA: What It Is, How It Works & How It's Used

Earnings before interest, depreciation, and amortization (EBIDA) is a measure of a company’s earnings that adds interest and depreciation/amortization expenses back to the net income number. It is similar to, but not as commonly used as, earnings before interest, taxes, depreciation, and amortization (EBITDA).

Here’s a closer look at EBIDA, how this metric is calculated, and how it compares to EBITDA.

What Is EBIDA?

EBIDA is a measure of the earnings of a company that adds interest (paid on debt), depreciation, and amortization expenses back to net income – the last line on the income statement. Unlike EBITDA, which adds back those items plus income taxes to net income, EBIDA does consider the effects of taxes on a company’s earnings.

How Does EBIDA Work?

EBIDA measures a company’s financial performance before the influence of accounting or financial decisions, such as how much debt (interest) the business has taken on or how much money it has invested in property, equipment, or licenses (depreciation/amortization).

While those expenses are initially subtracted from a company’s operating revenue to calculate its net income, EBIDA adds them back as another way to evaluate a company’s financial performance.

Here’s a look at specifically what EBIDA adds to net income:

•  Interest This is the interest a business pays on any loans, such as any type of small business loan. It is excluded from EBIDA because it reflects the financing structure of the business, rather than the company’s core operations. Adding back interest to net income also makes it easier to compare the relative performance of two companies with different capital structures.

•  Depreciation Depreciation is the process of writing off the cost of a tangible asset over the course of its useful life. Depreciation expenses will vary depending on whether a company has invested in long-term fixed assets that lose value due to wear and tear. It is excluded from EBIDA because it reflects historic investment decisions the company has made, but not its current operating performance.

•  Amortization Similar to depreciation, amortization is the process of writing off the value of an intangible asset, such as a copyright, patent, or license, over its useful life. An intangible asset is amortized because its value diminishes over time due to expiration. It is excluded from EBIDA for the same reasons that depreciation is excluded.

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EBIDA Formula

As with EBITDA, there is more than one formula for calculating EBIDA.

Formula 1:

Net income + Interest + Depreciation + Amortization = EBIDA

Formula 2:

EBIT (Operating Profit) + Depreciation + Amortization – Taxes = EBIDA

What Is EBIDA Used For?

EBIDA is not a commonly used performance metric. However, it can be helpful for comparing two different companies in the same industry because it shows earnings before the influence of accounting and financial deductions, which can vary depending on a company’s capital structure.

EBIDA is also used as a performance metric for companies that do not pay taxes, such as hospitals, religious organizations, charities, and other nonprofits. In this case, EBIDA can be used interchangeably with EBITDA.

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EBIDA vs EBITDA

Both EBIDA and EBITDA are financial metrics that are sometimes used in place of net income to evaluate a company’s operational performance. With both metrics, interest on debt and the noncash accounting expenses (depreciation and amortization) are added back to net income. Unlike EBITDA, however, EBIDA does not add back income taxes.

Because it includes the tax expense in the earnings measure, EBIDA is considered to be a more conservative valuation metric than EBITDA. EBIDA removes an assumption made in EBITDA – that some of the money used to pay taxes can be used to pay down debt. EBITDA assumes this because interest payments on business loans are tax deductible. This lowers a company’s tax burden, giving it more money to pay off debt.

EBIDA, on the other hand, doesn’t assume that taxes can be lowered through interest expenses. As a result, it does not add taxes back to net income.

EBITDA is a much more commonly used performance metric than EBIDA. In fact, EBITDA and seller’s discretionary earnings (SDE) are typically the most common metrics used to value small and mid-sized businesses.

Neither EBIDA nor EBITDA are compliant with the Generally Accepted Accounting Principles (GAAP). However, EBIDA is somewhat closer to compliance than EBITDA because it does consider the effect of taxes on a company’s net income.

EBITDA

EBIDA

Widely accepted as an earnings metric X
Adds back interest, depreciation, and amortization to net income
Includes the effect of income taxes on earnings X
Is listed on an income statement X X
Accepted by GAAP X X

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Pros and Cons of EBIDA

 

Pros of EBIDA Cons of EBIDA
Useful for comparing the operational performance of two companies in the same industry that have made different debt/investment choices Is not widely used by analysts in any industry
Does not differ as much from net income as EBITDA Can be deceptive as it will always be higher than net income
Can be a useful earnings measure for companies that do not pay taxes Is not GAAP-compliant

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EBIDA Example

Let’s take a look at an EBIDA example using the following financial information for Company X:

 

Total revenue $1,500,000
Cost of Goods Sold (COGS) $250,000
Depreciation $40,000
Amortization $30,000
Interest Expense $125,000
Taxes $40,000
Selling General, and Administrative Expenses (SG&A) $125,000

To calculate EBIDA, we’ll start with net income, which is total revenue minus COGs, SG&A, depreciation/amortization, interest, taxes, and other expenses. Net income for Company X is $890,000. Next, we’ll calculate EBIDA.

EBIDA = Net income + Interest + Depreciation + Amortization
EBIDA = $890.000 + $125,000 + $40,000 + $30,000

EBIDA = $1,085.000

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The Takeaway

Like EBITDA, EBIDA is a performance metric that allows analysts and investors to quickly gauge a company’s financial performance in a given reporting period. It includes the effect of taxes on net income, but it removes any costs associated with interest, depreciation, and amortization. Because of this, it can be considered a more conservative metric than EBITDA when analyzing a company. However, EBIDA is not commonly used.

Neither EBIDA nor EBITDA is GAAP-compliant. So if you’re applying for a small business loan, you can include your company’s EBIDA or EBITDA number, but you will still also need to include its net income.

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FAQ

How are EBIDA and EBITDA different?

EBIDA (earnings before interest, depreciation, and amortization) differs from EBITDA (earnings before interest, taxes, depreciation, and amortization) in that it does not add income taxes back to net income. Because of this, it is a more conservative approach to analyzing a company’s financial performance. EBIDA is also not as commonly used as EBITDA.

What does the acronym EBIDA stand for?

EBIDA stands for earnings before interest, depreciation, and amortization.

What is the formula for EBIDA?

Here are two formulas for EBIDA (earnings before interest, depreciation, and amortization):
Net income + Interest + Depreciation + Amortization = EBIDA
EBIT (Operating Profit) + Depreciation + Amortization – Taxes = EBIDA


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