What is EBITDA
EBITDA is the earnings before interest, taxes, depreciation, and amortization. The EBITDA measures the company’s profit by excluding all expenses that do not relate to the operating activities. To put it simply, EBITDA is an EBIT plus depreciation and amortization. The higher EBITDA the more profit the company generated after the operating expenses.
The EBITDA is useful when the stakeholders like investors and managers analyze the company’s ability to generate profit by focusing on the operating activities by ignoring the costs of the capital structure, tax, depreciation, and amortization which is not important to the performance of the ongoing operations.
Normally, the EBITDA is a financial tool to measure the company’s ability to operate its activity to generate profit. Furthermore, it is a tool to evaluate the company’s cash flow available to repay its debt obligation.
On the downside, a good EBITDA sometime can be misleading by the growing revenue generated when the company borrows heavily to boost its sales (which is excluded from the EBITDA calculation). Thus, the EBITDA is not a good tool to determine the financial risk of the company when it relies on EBITDA alone.
EBITDA Formula
EBITDA is calculated by sum up of the net income, interest expense, taxes, and depreciation and amortization, as the following EBITDA formula:
EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization
or
EBITDA = Operating Income + Depreciation & Amortization
EBITDA Calculation Example
For example, let’s say the Feriors company limited has the following financial results last year:
- Net Income: $2,000,000
- Interest Expense: $20,000
- Taxes: $100,000
- Depreciation & Amortization: $400,000
The Feriors company limited EBITDA will be: EBITDA = 2,000,000 + 20,000 + 100,000 + 400,000 = $2,520,000
Frequently Asked Questions
EBITDA is the earnings before interest, taxes, depreciation, and amortization. The EBITDA measures the company’s profit by excluding all expenses that do not relate to the operating activities. To put it simply, EBITDA is an EBIT plus depreciation and amortization.
EBITDA is calculated by sum up of the net income, interest expense, taxes, and depreciation and amortization, as the following formula: EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization
The higher EBITDA the more profit the company generated after the operating expenses.
