In assessing the performances of an issuer, we often only see the profit of the issuer. Fundamental analysts usually use cash flows (CF) in calculating the normal value of a stock. The CF which are calculated are the cash inflows and outflows of a company during a particular period of time and outside fixed costs, or EBITDA.

Why do we need to take EBITDA into consideration?

EBITDA is defined as earning before interest, taxes, depreciation and amortization.

Income and interest cost, like taxes cost , are excluded from the EBITDA calculation in order to focus on the operational performances of the company, and not on the costs of profit outside the company's operation. .

Depreciation and amortization. These fixed costs are included in non cash cost, because the company does not spend its cash on the costs. Depreciation is only an accounting practice used to allocate the purchase of fixed assets (such as machines and building). Also goodwill amortization which comes from the acquisition of other company where the gained price is higher than book value.

Therefore, it will be fairer if we see the growth of the EBITDA of the company rather than its net profit in assessing the performances of the issuer since it will prevent distortion of accounting practices (which can be intentional) as in net profit.

How can we get EBITDA from financial statement?

For issuers in Indonesia, there are other non cash costs besides depreciation and amortization, namely, foreign exchange profit/loss . Since many issuers use foreign currency to borrow money and conduct transactions, this item often causes the net profit of the issuer to fluctuate. This causes the issuer to add the net profit (foreign exchange loss) or deduct it (foreign exchange profit)from the net profit in the EBITDA calculation.

Therefore, we should consider the income statement and obtain the operating profit for convenience in the EBITDA calculation. The operating profit, which is obtained from the substraction of operating cost from gross profit (sales minus cost of goods selling), will be avoided from costs and interest rate, taxes, and the distortion of forex loss of profit.

However, depreciation which is charged through the cost of goods selling is included in the operating profit. For convenience, add the depreciation cost to the operating profit to obtain EBITDA.

How can we get the value of the depreciation cost?

in the annual report, the depreciation cost or amortization items can be seen in the report of the changes in cash flows. Nevertheless, if the quarterly statement which is usually not attached with the report of changes in cash flows, we can get the estimation by calculating the difference between the accumulation of fixed asset reduction in the current year with the previous year.

The formula:

Estimated EBITDA = business profit + depreciation cost

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