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Understanding EBITDA Calculation

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a measure of a company's operating profitability and financial performance. EBITDA is calculated by taking a company's operating profit and adding back non-cash expenses such as depreciation and amortization. This adjustment eliminates the effects of financing and accounting decisions, allowing for more accurate comparison between companies. EBITDA is often used by investors and in valuation methods.

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75 views2 pages

Understanding EBITDA Calculation

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a measure of a company's operating profitability and financial performance. EBITDA is calculated by taking a company's operating profit and adding back non-cash expenses such as depreciation and amortization. This adjustment eliminates the effects of financing and accounting decisions, allowing for more accurate comparison between companies. EBITDA is often used by investors and in valuation methods.

Uploaded by

mohsin munara
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EBITDA

EBITDA stands for earnings before interest, taxes, depreciation


and amortization. EBITDA is one of the indicator of a
company's financial performance.

EBITDA is Calculated as

EBITDA = Operating Profit + Depreciation Expense + Amortization Expense

The more simple formula for EBITDA is:

EBITDA = Net Profit + Interest +Taxes + Depreciation + Amortization

EBITDA is essentially net income with interest, taxes, depreciation and


amortization added back to it. EBITDA can be used to analyze and compare
profitability between companies and industries because it eliminates the effects of
financing and accounting decisions. EBITDA is often used in valuation ratios and
compared to enterprise value and revenue.

EBITDA is calculated by adding back the non-cash expenses


of depreciation and amortization to a firm's operating income

EBITDA = EBIT + Depreciation + Amortization

Let's take a look at a hypothetical income statement for Company XYZ:


To calculate EBITDA, we find the line items for EBIT ($750,000), depreciation
($50,000) and amortization (n/a) and then use the formula above:

EBITDA = 750,000 + 50,000 + 0 = $800,000

A professional investor contemplating a change to the capital structure of a firm


(e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings
potential (reflected by earnings before interest, taxes, depreciation and
amortization (EBITDA) and EBIT), and then determines the optimal use of debt vs.
equity.

To calculate EBIT, expenses (e.g. the cost of goods sold, selling and administrative
expenses) are subtracted from revenues. Net income is later obtained by
subtracting interest and taxes from the result.

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