3 reasons you absolutely need to understand EBITDA

If you have not heard of EBITDA before, google it. Because if you are a hotel General Manager or aspire to become one, your life will revolve around this term.

In managed hotels, General Managers are responsible for GOP ( Gross Operating profit). However as more professional managed hotels come into the country, the asset managers are looking at the EBITDA more than the GOP.

So what is EBITDA?

In its simplest form, EBITDA is Earnings before interest, taxes, depreciation and amortization.

It means after you arrive at this number, the property owner has to pay the interest on any loan, taxes on property, amortization and provide for depreciation.

The formula then will look like

EBITDA = Net Operating Income + Interest+Taxes+Depreciation+Amortization

Some uses of EBITDA are to compare profitability between hotels on an “apple to apple” basis.

Since you have no control over the the property tax and other payments, if you calculate profitability after paying them, the figures will vary widely.

EBITDA also provides you an easy way to ensure if the property owner will be at “peace” or not. If the earnings can cover the debt service and the interest of the property, then the property is in no immediate danger of bankruptcy.

3 reasons you absolutely need to understand EBITDA

To understand what is the expectation from you. Be aware and carefully manage the number so that you can operate with optimum profit margins. Remembers EBITDA is comparable between 2 hotels and your owner may own multiple hotels.

How well you perform on this score may determine your tenure with the company

To understand if the property can meet its debt service. If your Net operating income can take care of the interest and taxes, you can be rest assured that the owner will not be overtly worried.

To help in property sale. A higher EBITDA can help the property owner to get a higher loan in case of renovation or a property sale as the earnings are higher than its compset.