Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)
What is EBITDA?
EBITDA Formula (How to Calculate EBITDA)
To calculate EBITDA, start by reviewing a companyâs income statement. EBITDA is not included as a line item on the income statement, but you can calculate it easily by using other items reported on every income statement.
The formula for EBITDA is:
Let's take a look at a hypothetical income statement for Company XYZ:
|Company XYZ's Annual Income Statement|
To calculate EBITDA, we find the line items for Operating Income, or EBT ($350,000), Interest Expense ($50,000), Depreciation ($75,000) and Amortization ($25,000) and then use the formula above:
EBITDA = $350,000 + $50,000 + $75,000 + $25,000 = $500,000
In this example, the firm's EBITDA (i.e. earnings before subtracting non-cash depreciation and amortization expenses, as well as interest expenses and taxes) comes out to $500,000.
Alternate Formula to Find EBITDA
Another easy way to calculate EBITDA is to start with a company's net income, and then add back interest, taxes, depreciation, and amortization.
Here's how that formula looks:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
To find EBITDA using this formula, along with figures from the table above, start with the firm's Net Income ($250,000), then add Interest ($50,000), Taxes ($100,000), Depreciation ($75,000), and Amortization ($25,000).
Here's what the formula would look like:
EBITDA = $250,000 + $50,000 + $100,000 + $75,000 + $25,000 = $500,000
Why EBITDA is So Important
EBITDA is an operating measure commonly used by financial analysts.
Unlike net income, EBIDTA allows analysts to focus on the outcome of operating decisions while excluding the impacts of non-operating decisions like interest expenses (a financing decision), tax rates (a governmental decision), or large non-cash items like depreciation and amortization (an accounting decision).
By minimizing the non-operating effects that are unique to each company, EBITDA allows investors to focus on operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry, or companies operating in different tax brackets.