What Is EBITDA For Hotel Industry?

EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization. It defines how much net profit is made to the total revenue. EBITDA for the hotel industry defines how much the hotel industry is making a profit after the expenses.

According to The Economics Times

Earnings Before Interest, Taxes, Depreciation, and Amortisation, or EBITDA, is a statistic used to assess a company’s operating performance. It is a proxy for the cash flow generated by its complete operations

In the hotel industry, the EBITDA means the net earnings or profit made by the hotel, after deducting all the expenses from the total revenue.

All the expenses include the salary of the hotel’s employees, operational expenses, asset costs, and many others.

The calculation of EBITDA is important for the hotel industry because it helps to check the growth of the hotel.

It will give you a clear picture of how much you are spending and how much you are earning. Some time managerial team of the hotel calculates the EBITDA quarterly and semi-annually to check the net profit made by the hotel.

In the hotel industry, most hotels are on a rental basis some may be large-scale hotels or small-scale hotels. Because it is one of the most vital expenses of the hotel.

This will help you to keep the track of variable parameters of the hotel industry. The hotelier can check which parameter they can control to increase the percentage of the EBITDA.

The hotelier can calculate the EBITDA by adding the total cost spent by the hotel including the hotel rent. The losses of the past months should also get included in the expenses while calculating the EBITDA.

If a hotelier deducts interest payments, tax charges, depreciation, and amortization from earnings it may look simple task. But each hotel has different earnings and figures while calculating the EBITDA

In other words, EBITDA is sensitive to the earnings accounting games found on the income statement.

Even if we account for the distortions that result from excluding interest, taxation, depreciation, and amortization costs, the earnings figure in EBITDA may still prove unreliable.

In a simple way when you calculate the total earnings and then deduct the expenses of the hotel including depreciation and amortization

For depreciation and amortization, these are the variable number that keeps on changing with time.

Depreciation means the deduction in the value of the asset with time due to wear and tear.

Whereas, amortization means the interest or the extra cost we give for the product for a certain time period apart from the original cost

During the calculation of the EBITDA keep eye on the changing values of interest and tax then apply them for deduction from the earnings.

After understanding the terms and the method to use the EBITDA, let’s know about the formula for calculating the EBITDA.

EBITDA = Net sales – (raw material costs + employee costs + other operating expenses)

EBITDA Margin: As per the corporate finance institute it is defined

“EBITDA margin is a profitability ratio that measures how much in earnings a company is generating before interest, taxes, depreciation, and amortization, as a percentage of revenue.”

If the percentage is above then 10 % then EBITDA Margin is considered to be good.

EBITDA Margin = (EBITDA / Revenue) * 100

Terms of EBITDA are explained as:

Earning: Earnings mean the sales done by the hotel.

Interest: Interest paid by the hotel to any financial firm.

Taxes: Any kind of taxes that are eligible for the hotel industry paid to the government.

Depreciation: Reduction in the price of the asset with the time due to tearing.

Amortization: Amortization means the payment of the loan installments.

There are multiple benefits to calculating the EBITDA for the hotel industry. A few of them are discussed below.

EBITDA gives hoteliers a picture of how the hotel is performing. Is the hotel giving you a profit or is it no profit or no loss?

Although the EBITDA does not include the variable parameter, that varies from one hotel to another hotel. Let you know which hotel is doing better and which is not.

EBITDA is the simplest method to calculate the net profit of the hotel. Though it does not give you the gaps that increase the expenses.

Hence we can conclude that EBIDTA is one of the good methods to find out whether or hotel is earning profit or not.

Many other hotels also use the EBITDA same formula to calculate the profit, so you can compare easily with others.

The purpose of the EBITDA is to give a broad idea of the financial status of the hotel and its profits.

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