How To Calculate EBITDA

EBITDA is net income plus tax, interest, depreciation and amortisation. A business earning three hundred and twenty thousand after paying one hundred and eighty thousand of tax and ninety five thousand of interest, with two hundred thousand of depreciation and amortisation, has EBITDA of seven hundred and ninety five thousand.

The add-backs each remove a specific distortion. Tax is removed because it depends on where a company is domiciled and how it is structured. Interest is removed because it depends on how the business is financed rather than how well it trades.

Depreciation and amortisation are removed because they are accounting estimates rather than cash movements. A machine bought years ago produces an annual depreciation charge that reflects a purchase price and a useful-life assumption, not anything that happened this year.

The measure is closest to operating cash earnings, which is why it is the standard for comparing companies with different capital structures. Two identical businesses, one funded with equity and one with debt, produce very different net income figures and nearly the same EBITDA.

It is also the denominator in the most widely quoted valuation multiple. Enterprise value divided by EV to EBITDA is how many years of EBITDA it would take to buy the business, and it is applied across sectors precisely because it neutralises financing differences.

The criticism is that EBITDA ignores real cash costs. Depreciation may be an estimate, but replacing worn out machines is a genuine expense, and a business that never replaces them eventually earns nothing at all. Capital expenditure is not in EBITDA and it is not optional.

Working capital movements are also outside the figure. A growing business ties up cash in receivables and inventory before it ever collects, so strong EBITDA can coexist with a deteriorating cash position, particularly in a fast expansion.

EBITDA margin normalises the measure for size by dividing by revenue, which makes comparison across scales possible. Seven hundred and ninety five thousand on one point five million of revenue is a fifty three percent margin, which is high and reflects a capital-light operation.

It is not a GAAP or IFRS measure, so the exact definition can vary between companies. Adjusted EBITDA adds back further items such as share-based compensation or one-off restructuring costs, and those adjustments warrant scrutiny.

The difference between EBITDA and EBIT is exactly the depreciation and amortisation add-back, and that difference is a rough proxy for capital intensity. A company with a large gap between the two is capital-heavy, and that matters when judging the quality of the earnings.

Finally, EBITDA sits above tax and interest. It tells you nothing about whether a business can actually service its debt or pay its shareholders, which is why lenders look at interest cover rather than EBITDA alone.