As an investor, it’s crucial to assess the financial health and profitability of a company before making any investment decisions. Sometimes an acquiree (hereinafter referred to as a project) will voluntarily present the company’s net profit, net worth or full-year revenue to show that it is a quality investment acquisition. While there are various financial metrics available, two important measures to pay attention to are EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). These metrics provide valuable insights into a company’s operating performance and can help investors make informed choices.
Meanwhile, we can find that the disclosure of EBIT & EBITDA is not mandatory in the financial statements/audit reports of Chinese enterprises, even in the annual reports of listed companies’ group financial audits. However, in most of European and American countries, the disclosure of EBIT & EBITDA is included in the financial statements and auditor’s report, which is an important index for management and potential investors to identify. Therefore, it is important to learn how to extract the EBIT & EBITDA from the financial statements in China.
- Concept
- EBIT (Earnings Before Interest and Taxes):
EBIT is a measure of a company’s profitability that focuses solely on its operating performance by excluding non-operating expenses such as interest and taxes. The Taxes here refers to the CIT (Corporate Income Tax). The calculation formula is:
| EBIT |
= net profit + income tax + interest |
“Indirect perspective” |
| = marginal contribution – fixed operating costs |
“Direct perspective” |
| = sales revenue – variable costs – fixed costs |
“Direct perspective” |
| = sales revenue – costs – operating expenses |
“Direct perspective” |
By looking at EBIT, investors can evaluate a company’s ability to generate profits from its core operations without the influence of external factors. It provides a clearer picture of a company’s operating efficiency and profitability, allowing investors to compare the performance of different companies within the same industry.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):
EBITDA is another essential metric that provides insights into a company’s operational profitability. It further removes the impact of non-cash expenses like depreciation and amortization, which are accounting measures used to allocate the cost of assets over time. The Taxes here refers to the CIT (Corporate Income Tax). The calculation formula is:
| EBITDA |
= net income + income tax + interest + depreciation + amortization |
By excluding these non-cash expenses, EBITDA allows investors to focus on a company’s ability to generate cash from its operations, which can be useful when comparing companies with different accounting methods or capital structures.
- Why Should Investors Pay Attention to EBIT and EBITDA?
EBIT is mainly used to measure the profitability of a company’s main business. By excluding income tax and interest, it allows investors to evaluate projects without considering the income tax rate and financing costs applicable to the project, which makes it easy for investors to examine projects in different capital structures.
EBITDA is primarily used to measure a company’s ability to generate cash flow from its main business. By excluding income taxes, interest, depreciation and amortization, it makes it easier for investors to focus on the estimation of future capital expenditures when examining a project. This is because amortization and depreciation include the costs paid when fixed assets and intangible assets were acquired in previous accounting periods, rather than the current cash outlay that investors focus on.
However, it’s important for investors to exercise caution when relying too heavily on EBITDA for valuations. EBITDA should be considered alongside other financial metrics such as net income, cash flow, and financial strength to develop a comprehensive understanding of a company’s fundamentals.
Our sharing will continue in the next article. In the next articles, we will explain each of the components of the EBIT & EBITDA so that investors will know why they are important to obtain them and what their significance is.
If you have any questions, please feel free to contact us.
(Continued from the previous article)
- Provision on bona fide acquisition of false special invoices
«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement» defines what is “bona fide”.
It is stated in the Circular that the purchaser shall be deemed to have obtained the false special invoice in good faith if all the following conditions are met:
- a genuine transaction between the purchaser and the seller;
- the sale is made using the special invoices of the province (autonomous region, municipality directly under the Central Government, and cities listed in the plan) in which the purchaser is located;
- all the contents of the special invoices match with the actual ones, such as the name of the seller, the seal, the number of goods, the amount, and the tax amount; and
- no evidence that the purchaser knows that the special invoices provided by the seller were obtained by illegal means.
On the other hand, tax authorities of the purchaser’s location shall grant credit for input tax or export tax refund in accordance with the law, if:
- the purchaser is able to obtain again from the seller a legal and valid special invoice issued by the anti-counterfeit tax-control system; and
- the purchaser has obtained the certificate that the tax authorities in the place where the seller is located have conducted or are conducting an investigation and punishment on the seller’s false special invoices accordingly.
However, if the above conditions cannot be met, the input tax deducted or the export tax refund obtained by the purchasing party shall be recovered accordingly.
In addition, if the taxpayer has obtained in good faith a false special invoice that has been recovered and deducted in accordance with the law, then the taxpayer does not need to consider the provisions of Article 32 of the «Tax Collection Administration Law of the People’s Republic of China»: – If the taxpayer fails to pay the tax in accordance with the prescribed period, and the withholding agent fails to settle the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five percent of the tax due on a daily basis. If the taxpayer fails to pay the tax in accordance with the prescribed period, the taxation authority shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five ten thousandths of the late payment of tax on a daily basis from the date of the late payment of tax. In other words, tax authorities will not add the late payment fee arising from the recovery of past taxes.
- Necessary documentation in case the tax inspection happens
Through the above layer-by-layer analysis, accountants of enterprises need to prepare the necessary financial documents to respond to tax inspection, while supporting themselves if they are bona fide purchasers, including but not limited to: –
- the original special invoice was identified as a false invoice
- purchase and sale contracts/business contracts or other contracts involving the invoice
- the goods involved in the incoming order, outgoing order, transfer orders, or transport documents
- relevant accounting documents
- bank payment voucher
- VAT declaration report for the month in which VAT is deducted, and CIT annual return
- statement of the entire business transaction and tax declaration
To sum up, enterprises do not need to be too panicky after receiving the Notice of Tax Inspection. Prepare the above list of supporting materials first and conduct self-inspection after communicating with the relevant tax officer to understand the situation. Companies that have evidence to prove they are bona fide invoice purchasers should actively respond to the tax authorities’ inspection and cooperate with the follow-up investigation. The enterprise will usually pass the tax inspection successfully if they respect all the conditions mentioned previously.
If you have any questions, please feel free to contact us.
References:
«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement»
http://www.chinatax.gov.cn/chinatax/n359/c448/content.html
China is now fully open! In order to better coordinate the epidemic prevention and control as well as the needs of economic and social development, and to facilitate the people-to-people exchange between China and foreign countries, the National Immigration Administration of PRC has decided to adjust the visa and entry policy starting as of Beijing time at 00:00 on March 15, 2023.
- Valid visas issued before 28 March 2020 by the Chinese visa authorities abroad will resume functioning.
- Foreigners may apply for all types of visas, including tourism and medical treatment.
- Port visas shall resume being issued in line with the relevant laws and regulations.
- The visa-exemption policy for Hainan, visa-exemption cruise policy for Shanghai, visa-exemption policy for foreigners to visit Guangdong from Hong Kong and Macao, and visa-exemption policy for ASEAN tour groups to Guilin, Guangxi shall resume operation.
In recent times, the immigration policies of many countries are updated in real-time. In addition to the reopening policy, other restrictions are listed below for your consideration.
Chinese embassies in many countries notice: From 15 March, antigen testing instead of nucleic acid testing.
According to the latest requirements of the Chinese government regarding the optimization of pre-trip testing measures for people traveling to China, starting from 15 March 2023, passengers flying directly from specific countries[1] to China are allowed to replace nucleic acid testing with antigen testing (including self-testing with kits). In order to facilitate the pre-trip preparation of travelers, the embassies concerned have issued guidelines on epidemic prevention and control.
- Distal testing: Nucleic acid testing within 48 hours before boarding or self-testing with antigen kits, negative results before going to China, positive results please go to China after turning negative.
- Customs declaration: After obtaining a negative test result, fill out the “Health Declaration Card of the People’s Republic of China” through the WeChat app “Customs Passenger Service” (“海关旅客指尖服务”), the Customs APP or the web version to make declaration.
- Airlines are not required to check pre-boarding nucleic acid test certificates and antigen test results.
- In-flight epidemic prevention: Please insist on wearing a mask during the flight and do your personal protection to reduce the risk of infection.
- Entry quarantine: Upon arrival at the port, complete the necessary customs clearance procedures with the customs health declaration code. Customs will test a sample of people with abnormal health declarations or fever and other symptoms in accordance with a certain percentage.
- passengers with positive test results, in accordance with the requirements of the notification letter, go home/living place for isolation, or medical treatment;
- passengers with negative test results, by the Customs and Excise Department in accordance with the “Frontier Health and Quarantine Law of PRC” and other laws and regulations to implement routine quarantine;
- passengers with normal health declarations and tests can pass the entrance.
- Territorial epidemic prevention and control: Passengers should strictly comply with the requirements of territorial epidemic prevention and control after entering the country.
Policies vary from country to country, so it is recommended that you pay attention to the latest Chinese embassy and consulate notices in real-time before making travel arrangements, read them carefully, and follow them to avoid affecting your trip.
Should you have any further questions, please feel free to contact us.
Reference:
Further Adjustment of Visa and Entry Policy for Foreigners to China
Authority: National Immigration Administration
Date: 2023-03-14
https://www.nia.gov.cn/n897453/c1566449/content.html
Notice on Further Adjustment of Visa and Entry Policy for Foreigners to China
Authority: Embassy of the People’s Republic of China in the United States of America
Date: 2023-3-13
http://us.china-embassy.gov.cn/chn/lsfw/zj/qz/202303/t20230314_11040138.htm
[1] Currently, the following countries have issued this notice: France, Italy, Denmark, Spain, Georgia, Tanzania, Nepal, Mongolia, Vietnam, Iran, Greece, Brunei, Thailand, New Zealand, Malaysia, etc.
