Earnings Before Interest, Tax, Amortization And Exceptional Items (EBITAE)

What Is Earnings Before Interest, Tax, Amortization And Exceptional Items?

Earnings Before Interest, Tax, Amortization and Exception Items (EBITAE) is an accounting metric often used to deduct the amortization of intangible assets to arrive at a value. Amortization refers to spreading payments over multiple periods, and companies will use EBITAE not only as a measure of performance but also to determine interest coverage capabilities. The eliminated items are often seen as factors that distort earnings derived from the underlying business operations of a firm.

Understanding Earnings Before Interest, Tax, Amortization And Exceptional Items (EBITAE)

Earnings Before Interest, Tax, Amortization and Exception Items (EBITAE) is calculated as revenue minus expenses with expenses excluding interest, taxes, amortization of intangible assets and exceptional items.

When evaluating EBITAE, investors will look at the figure as a percentage of revenue and they will also measure EBITAE margin. Both the percentage and margin will be compared to previous years' figures to evaluate performance. This ratio is very similar to EBITDA, a very popular performance measure often used by investors to help determine a company's overall financial health. EBITDA was first used in the 1980s and is a metric not regulated by Generally Accepted Accounting Principles (GAAP). 

GAAP refers to a common set of accounting principles, standards, and procedures that companies must follow when they compile their financial statements. GAAP is a combination of authoritative standards set by policy boards and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of and communication around financial information.

EBITAE versus EBITDAE

Earnings before interest, taxes, depreciation, amortization and exception items, or EBITDAE, is also an accounting measure of a company’s operating performance, but is calculated differently than EBITAE and includes depreciation in the equation. 

EBITDAE is calculated by taking earnings before interest and taxes plus depreciation plus amortization plus exceptional items. Essentially this formula provides a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, unusual events, or tax environments. EBITDAE can easily be derived from the company’s income statement and balance sheet.

Examining EBITDAE allows analysts to hone in on the outcome of operating decisions while excluding most of the impacts of non-operating decisions. Such analysis is particularly important when comparing similar companies across a single industry.

EBITDAE also isn't regulated by GAAP, so investors are at the discretion of the company to decide what is, and is not, included in the calculation from one period to the next. Therefore, when analyzing a firm's EBITDAE, it is best to do so in conjunction with other factors such as capital expenditures, changes in working capital requirements, debt payments as well as exceptional items.