EBITDA Formula and Calculator

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a metric commonly used by companies to measure their operational performance. By analyzing their earnings without taking variables like interest or taxes into consideration, companies can more easily compare the results of their operational activities to other businesses within their industry. 

To calculate your company’s EBITDA, you will want to review a recent income statement for the period of time you’d like to analyze. You may also need a cash flow statement for the same period of time to find depreciation and amortization (D&A). 

Reviewing the income statement, or profit and loss statement, locate your operating profit. Operating profit shows revenue less cost of goods sold and operating expenses. Unlike net income, or the “bottom line” of the P&L statement, it does not take into account tax or interest expenses. It does, however, include depreciation and amortization. So we’ll need to add those back in to calculate EBITDA. 

Turn to your cash flow statement to find depreciation and amortization and those values into the EBITDA calculator. 

The resulting dollar amount will be your company’s EBITDA. In order for EBITDA to be a meaningful metric to your company, you will want to calculate it regularly and monitor any changes. You’ll also want to compare your own EBITDA to that of other companies in your industry to see how your operations stack up.

What is EBITDA?

EBITDA is commonly used by investors and business owners to compare similar businesses. Business owners might also use this metric to keep an eye on how efficiently their business is operating. 

Factors like location and debt structuring can have a big impact on a business’ bottom line. Tax rates in one state may be significantly lower than tax rates in another, for example, making two identical companies appear as though one is less profitable. EBITDA, by comparing business financials before taking taxes, interest, depreciation and amortization into account, allows for a more apples-to-apples comparison of how each business operates. 

It’s for this reason that private equity groups and investors pay close attention to this metric, as well as companies who are anticipating a sale in their future. It allows them to gauge the company’s operating performance, quickly compare to others in the industry, and get a feel for a company’s valuation. 

EBITDA is a non-GAAP metric, meaning it is not recognized by the generally accepted accounting principles. It’s also not recognized by IFRS, or international financial reporting standards. We’ll cover the disadvantages of EBITDA shortly, but the main reason for its exclusion from these guiding accounting structures is because reviewing EBITDA alone does not present a full picture of the company. In other words, it can be manipulated. 

Like all financial metrics, EBITDA is best calculated in tandem with other metrics that help business owners and investors understand the whole picture of a business’ health.

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EBITDA Formula Equation

For those wanting to calculate EBITDA by hand, there are two methods you can employ. All you’ll need to get started are your financial statements, specifically the income statement and cash flow statement, for the period you’d like to review. Many companies may choose to calculate EBITDA monthly or quarterly to review performance. Those anticipating a sale may also need to calculate it on an ad hoc basis for potential buyers. 

The two EBITDA formulas are:

Method #1: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Method #2: EBITDA = Operating Profit + Depreciation + Amortization

The two formulas end up at the same number. They simply do so by starting at different points in the income statement. 

  • In Method #1, you’ll start at the bottom line of the income statement, or net income. Net income is calculated by subtracting all expenses from total revenue. This includes everything from cost of goods sold (COGS) to interest and tax payments. In order to calculate EBITDA then, we must add back in the interest and tax line items. We also need to add in the depreciation and amortization expense, which live on the cash flow statement. 
  • In Method #2, you’ll start in the middle of the income statement with operating profit, also known as operating income. Operating profit shows only total revenue less COGS and operating expenses. This means that tax and interest expenses are already excluded. So we simply need to add depreciation and amortization. 

The method your business uses will rely on personal preference. Of course, calculators and software applications also exist to alleviate you of doing it by hand altogether. (You’re welcome.) 

That said, we’ve broken down each piece of the EBITDA formula here to help understand what this metric means and what it reveals about your business. 

Net Income

Put simply, net income is profit. It is the “bottom line” on the income statement, showing what’s left after subtracting all expenses from total revenue, including COGS, operating expenses, non-operating expenses, taxes, interest, and all other expenses. It also goes by the name “net profit.”

Interest

Interest is a reflection of how a business finances its activities. Because how a business raises capital can vary widely, interest payments can also vary from company to company. 

For that reason, it’s removed from consideration here. How a company chooses to finance its activities, also called its capital structure, makes comparing business operations difficult.

Taxes

Where a company is located dictates how much they will pay in taxes. Every region and jurisdiction has different tax requirements by which companies must abide. This means that tax payments can also vary widely from one company to another, and even more than interest payments, companies have little control over how much they’ll owe. 

Since tax obligations aren’t uniform, they’re taken out of consideration here.

Depreciation & Amortization

Depreciation and amortization (D&A) refers to any investment that loses value over time. When it comes to depreciation, this means tangible fixed assets like equipment, vehicles, or a building. For amortization, it means intangible assets like patents. 

In both cases, these non-cash expenses show the deteriorating value of these assets. In the case of a vehicle, for example, a business owner may expect it to be on the road for five years. So every month until the end of its useful life, the resale value on that vehicle will go down. The same goes for intangible assets. While a patent doesn’t deteriorate before our eyes, it does lose value as its expiration date nears. 

Determining depreciation expenses and amortization expenses is highly subjective. When business owners purchase a piece of equipment, they will decide on the useful life as well as the salvage value they can expect when the equipment reaches the end of it. Because of their subjective nature, they are also removed from consideration in the EBITDA metric. 

With interest, tax, depreciation, and amortization expenses rolled into net income, business owners and parties interested in acquiring a business are able to compare companies more easily. However, for companies with a great deal of fixed assets, they may consider an alternative.

EBIT vs. EBITDA 

Another popular metric that is very similar to EBITDA is EBIT, or earnings before interest and taxes. As the name hints, the key difference between EBIT and EBITDA lies in their treatment of depreciation and amortization. 

While EBITDA disregards D&A expenses as too variable among comparable companies, EBIT factors those expenses back in. The main use for EBIT is to give a more accurate understanding of how a business with a large amount of fixed assets operates. A large depreciation expense not only boosts EBITDA but it also hints at upcoming expenditures when those assets reach the end of their useful lives. In cases like this, EBIT may prove a more helpful metric for planning for those upcoming expenses. 

EBITDA Margin

Another useful, related metric is EBITDA margin, which simply looks at EBITDA as a percentage of total revenue. The formula for this financial ratio is simply:

EBITDA Margin = EBITDA / Total Revenue

This metric is primarily for useful for businesses that do not have a high level of debt or that do not regularly make purchases of large fixed assets. In those cases, depreciation plays a big role and should be factored into most metrics. However, for a company that has little debt or depreciation to account for, EBITDA margin can be a helpful metric to keep an eye on, as it breaks down operational profits into a percentage. 

Let’s take a bookstore as an example. Liber Bookstore reviews their income statement and cash flow statement from the previous quarter and notes the following: 

  • Total Revenue: $600,000
  • COGS: $250,000
  • Operating Expenses: $75,000
  • Tax Payments: $25,000
  • Interest Payments: $5,000
  • Net Income: $245,000
  • Depreciation & Amortization: $5,000

Given this information, the business owner’s first step is to calculate EBITDA. Remember, they can do so using one of two methods.

Method #1: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA = $245,000 + $5,000 + $25,000 + $5,000 

EBITDA = $280,000

Method #2: EBITDA = Operating Profit + Depreciation + Amortization

EBITDA = $600,000 – $250,000 – $75,000 + $5,000 

EBITDA = $280,000

No matter the method used, the result is the same for Liber Bookstore. Now, if the owner wanted to calculate only EBIT, the result would look slightly different.

EBIT = Operating Profit   OR   EBIT = Total Revenue – COGS – Operating Expenses

EBIT = $600,000 – $250,000 – $75,000

EBIT = $275,000

Note that EBIT is slightly lower than EBITDA because it does not take depreciation and amortization into account. 

Finally, to calculate EBITDA margin, the bookstore owner would look compare EBITDA to total revenue.

EBITDA Margin = EBITDA / Total Revenue

EBITDA Margin = $280,000 / $600,000EBITDA Margin = 47%  

Because these EBITDA calculations are meant to be used to compare the business’ financial performance to others within the industry, Liber Bookstore’s next stop would be to research industry averages and use their findings to help influence accounting decisions in the future.

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The Pros & Cons of EBITDA

So far, we’ve focused largely on the pros of EBITDA, which are that it allows businesses with different capital structures to be compared based roughly on operational performance. The downside? Sometimes, in order to evaluate a business thoroughly, taxes, interest, depreciation, and amortization matter. And let’s not forget that it does fall outside of GAAP. 

Businesses with large amounts of debt or fixed assets might give using EBITDA as a primary metric for the business a second thought. EBIT may be a more useful alternative in that case. 

Whether your business decides to adopt calculating EBITDA as a key metric or not, it’s important that it be used in conjunction with other metrics so that all parties reviewing these metrics can gain an accurate understanding of the company’s profitability. Understanding your operating profitability, as well as all the other ways that profitability can be sliced, diced, and interpreted, will allow your business to make smart operational and accounting decisions. It will also help you to put your best foot forward if a sale is in your future.

Ready to see how ScaleFactor can help you analyze the metrics that matter most to your business? Schedule a demo with an expert today.

Grab your latest income statement and cash flow statement. Input the amounts for operating profit, depreciation, and amortization.

EBITDA:
$

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