EBITDA Calculator
Calculated EBITDA:
Understanding EBITDA: A Core Metric for Business Valuation
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is a widely used financial metric that evaluates a company's operating performance. It acts as a proxy for the cash flow generated by a business's core operations, stripping away the effects of financing decisions, accounting treatments, and tax environments.
Why Do Analysts Use EBITDA?
EBITDA is preferred by investors and business buyers because it allows for a "head-to-head" comparison between companies in the same industry that might have different capital structures or tax obligations. By removing non-cash expenses like depreciation and amortization, it highlights the raw profitability of the business model.
The Components of the EBITDA Formula
- Net Income: The "bottom line" profit after all expenses, including interest and taxes, have been deducted.
- Interest: The cost of debt. Since interest varies based on how a company is financed, adding it back focuses on operational success regardless of debt levels.
- Taxes: Tax rates vary by region and previous losses. Adding taxes back creates a level playing field for comparison.
- Depreciation: A non-cash expense representing the wear and tear of physical assets (machinery, vehicles).
- Amortization: A non-cash expense representing the expiration of intangible assets (patents, trademarks).
How to Calculate EBITDA: A Step-by-Step Example
Scenario: "ABC Manufacturing" reported the following figures for the fiscal year:
- Net Income: $450,000
- Interest Expense: $30,000
- Income Taxes: $120,000
- Depreciation: $50,000
- Amortization: $5,000
Calculation:
$450,000 (Net Income) + $30,000 (Interest) + $120,000 (Taxes) + $50,000 (Depreciation) + $5,000 (Amortization) = $655,000
The EBITDA for ABC Manufacturing is $655,000.
Limitations of EBITDA
While powerful, EBITDA is not a replacement for cash flow. Because it ignores capital expenditures (CapEx)—the money spent to buy or maintain physical assets—it can sometimes make a capital-intensive company look more profitable than it actually is. It is best used alongside other metrics like Operating Cash Flow and Net Income to get a full picture of financial health.
EBITDA Margin
Once you have calculated EBITDA, you can find the EBITDA Margin by dividing the result by total revenue. This percentage helps you understand how much profit a company makes on every dollar of sales before accounting for the non-operational costs mentioned above.