EBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a good indicator of a hotel’s financial performance and allows revenue managers to compare hotel profitability against competitors or sister properties.
What is EBITDA For?
EBITDA is used to evaluate the profitability of a hotel’s operations. It is specifically used to analyze the profits of the products and/or services sold at a hotel property. EBITDA is sometimes used as a more reliable calculation for profitability in place of simple earnings or net income.
Benefits of EBITDA
EBITDA is an effective indicator of a hotel’s financial performance because it does not account for the impacts of financing and accounting decisions or tax environments. It gives revenue managers a useful metric for comparing a hotel property with other properties owned by the same chain. It also allows for comparisons against industry averages. Furthermore, it can provide managers with a shortcut to estimate availability of cash flow to cover long-term debt payments on assets.
Limitations of EBITDA
EBITDA calculations can be limiting because they don’t include the costs of capital investments, such as property and equipment. For this reason, using solely EBITDA to evaluate profitability can be misleading.
How is EBITDA Calculated
EBITDA can be calculated in two ways. The first is by subtracting expenses from revenue. In this case, expenses do NOT include interest, taxes, depreciation, and amortization. The second is by adding net income, interest, tax expenses, and depreciation and amortization together.
Example of EBITDA Calculation
In this example, we’ll use the latter of the two formulas mentioned above.
EBITDA = Net Income + Taxes + Interest Expense + Depreciation and Amortization (D&A)
Net Income = $2,000,000
Taxes = $325,000
Interest Expense = $6,000
Depreciation and Amortization (D&A) = $3,000
EBITDA = $2,000,000 (Net Income) + $325,000 (Taxes) + $6,000 (Interest) + $3,000 (D&A)
EBITDA = $2,334,000