Earnings Before Interest, Depreciation, and Amortization (EBIDA)Measuring a companies earnings

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What Are Earnings Before Interest, Depreciation, and Amortization?

Earnings Before Interest, Depreciation, and Amortization (EBIDA) only means that interest expense, depreciation, and amortization expense are added back to the net income to measure a company’s earnings.

The counterpart of EBIDA is EBITDA, which considers the impact of tax expense and is the more popular measure.

Understanding Earnings Before Interest, Depreciation, and Amortization (EBIDA)

Earnings Before Interest, Depreciation, and Amortization

There are two methods how to get the EBIDA: one method is by adding to the net income the interest, depreciation, and amortization expense.

The other method is subtracting interest taxes from Earnings before Interest and Taxes then adding back the depreciation and amortization expense.

This analysis tool is used to compare the operational standing of companies within the same industry.

The effects of financing are not included in EBIDA, where the paid taxes is a direct result of the use of debt.

EBIDA computation is widely used by non-profit organizations which do not pay taxes.

Some examples of not-for-profit organizations are hospitals, charitable institutions, religious organizations, etc.

EBIDA in this case can also be used interchangeably with EBITDA due to the absence of taxes paid.

Special Considerations

The EBIDA computation provides a more conservative way of evaluating the company’s earnings.

Because, unlike EBITDA which adds tax expenses to the net income and assumes that what is paid in taxes can be utilized to pay debts, the EBIDA does not.

EBITDA considers the interest payments which are tax deductible and can be used to decrease the company’s tax liability.

The excess amount may help pay the company pay off its debts.

In contrast, EBIDA does not assume that interest payments can lower the tax expense – the reason why it does not add back the taxes.

Criticism of EBIDA

The reason why EBIDA is not a commonly used earnings analysis method is that it does not accurately provide the company’s net income to be used as a comparison, analysis, and forecasting tool.

Also, the EBIDA amount will always be higher than net income and EBITDA which may negatively impact the decision-making of management.

Also, EBIDA does not conform with the Generally Accepted Accounting Principle (GAAP), unlike EBIT and EBITDA.

Using EBIDA is a matter of management’s decision, only to be internally used.

It does not contain other key accounts such as working capital changes and capital expenditures.