- Taxi fares earned – 2 lacs
- Petrol cost – 50,000
- Maintenance cost – 10,000
Now, my EBITDA would be 2 lacs – 50,000 – 10,000 = 1.4lacs
However, this 1.4lac figure is not actual profit for me because I have not considered ITDA.
Lets consider each one and take that into account. Since I bought a 2 lac car, I would have taken a bank loan for say 1 lac. This would have EMI payments. Lets consider it to be 1000 per month or 12000 in a year
So I= -12000
The D stands for Depreciation. It is a way of measuring the loss of value of an asset you posses. So, in our example, my asset is my beloved Nano. However, after 1 year, if I sell it, I might get, maybe, 1 lac for it. I paid 2 lacs for it. SO my depreciation would be 1 lac.
D = – 1 lac
The A stands for Amortization. it is similar to Depreciation but for intangible assets. In my example owning the brand new nano was an intangible asset. All my customers were eager to try it out and check out the interior space etc. So, when I asked for double fare especially from people coming out of grand buildings like UB city, they never complained and paid up. However, over the next few years nano would become more common place, the novelty factor wears out and people would not be willing to pay me double fare. So, next year I might not make 2lac in fares. I might make only 1.9lacs. so my amortization is 10,000
A = -10,000
Now, we can calculate the tax as follows –
Taxable income = 1.4 lacs – 12,000(I) – 1 lac(D) – 10,000 (A) = 12,000
IT = 30% of 12,000 = 3,600.
So, my net income or profit for the year when I drove a nano taxi is 8,400 rupees.
As you can clearly see the difference between EBITDA and net profit is huge. Hence, US has specified that all companies that are listed on stock exchange should use GAAP ( generally accepted accounting principles) which means declaring net profit/loss along with EBITDA.
EBITDA margin is the EBITDA divided by total revenue as percentage. So, for my taxi business EBITDA margin is 1.4lac/2lac * 100 = 70%!!
For a much simpler and non-accurate example you can consider the salary that you saw in your offer letter as your EBITDA. The net salary that you get in your bank account is the net profit…rest just vanishes
If you are still wondering what JNNURM stands for – it is Jawaharlal Nehru National Urban Renewal Mission.