What is the EBITDA Formula?

Mathematically, it can be calculated using two methods

Method 1 – Starts with Net Income

  • EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization Expense

Method 2 – Starts with EBIT

  • EBITDA + EBIT + Depreciation & Amortization Expenseor EBITDA = EBT + Interest Expense + Depreciation & Amortization ExpenseAmortization ExpenseAmortization of Intangible Assets refers to the method by which the cost of the company’s various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more

Although the above formula is predominantly used in the calculation of earnings before interest, tax, depreciation, and amortization and will be discussed in detail in this article, there is another way for EBITDA calculation. In the second method, EBITDA can be calculated by deducting all expenses from net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company’s gross sales.read more other than interest, taxes, and depreciation expenses. But this method is not popular and is not elaborated on in this article.

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Steps to Calculate EBITDA

EBITDA Calculation Example

Example #1

J.C. Penny is an American furniture, bedding, and department store company. Below is the screenshot of the Income Statement of J.C. Penny:

  • It is very simple since the entire information required for its calculation is already contained in the income statement. The first step in calculating EBITDA from the income statement is to arrive at the operating profit or Earnings before Interest and Tax (EBIT). The data can be found in the income statement after the depreciation & amortization expenses and selling, general & administrative (SG&A) expenses. Now that EBIT has taken out the depreciation and amortization expense in the income statement, it is required to add back the expense to assess the company’s cash flow. When these non-cash expenses are added to EBIT, it is then recognized as the earnings before interest, tax, depreciation, and amortization, which is the real amount of cash generated by the company’s operation. Various investors and users of financial statements use the EBITDA equation because they believe that non-cash expenses are not actual cash outflow and, as such, should be considered during the assessment of the company’s real cash flow. Consequently, it is considered that the EBITDA formula is the financial metric which reveals the true cash flow position of the company.

Source: jcpenney.com

In 2017 the company’s total revenue was $12.5 Bn, with a net lossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read more of around $116 million.

  • Calculation using Formula 1

Operating Profit given as $116 million and Depreciation and Amortization is $570 million.

EBITDA = 116 + 570 = $686 million

  • Calculation using Formula 2

So, EBITDA = -116 +325 -126 +570 = $653 million.

Now you will notice some differences between the values of formula#1 and #2. The reason is that there is an exceptional item called “Loss on extinguishment of debt,” which is around $30 million that comes between Operating IncomeOperating IncomeOperating Income, also known as EBIT or Recurring Profit, is an important yardstick of profit measurement and reflects the operating performance of the business. It doesn’t take into consideration non-operating gains or losses suffered by businesses, the impact of financial leverage, and tax factors. It is calculated as the difference between Gross Profit and Operating Expenses of the business.read more and Net Income. Still, we have not added that amount in Formula#2.

Example #2

Starbucks Corporation is a U. S. company founded in Seattle, which is in the coffee and coffeehouse chain business. Below is the screenshot of the 2018 Income Statement of the corporation:

Source: Starbucks.com

We can see that in 2018 the company’s total revenue was $24.7 Bn, with a net income of around $4.5 billion. Using the above-given values, we will calculate EBITDA with both the formulas:

Operating Profit given as $3,883 million and Depreciation and Amortization is $1,247 million.

EBITDA = 3383 + 1247 = $4,630 million

Interest Expense = -$170.3 + 191.4 million = $21.1 million

So, EBITDA = 4518 +21.1 +1262 +1247 = $7,048 million.

The difference using formula#1 and formula #2 is because of some one-time expenses, such as the acquisition of joint ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more and divestiture of some operations, which are not added back while calculating in formula #2.

Example #3

Google is a U.S. company in the internet service and products business, such as a search engine. Below is the snapshot of the 2018 Annual report:

Source: Google

In 2016 the company’s total revenue was $90.3 Bn, with a net income of around $19.5 billion. Therefore, using the above-given values, we will calculate EBITDA with both the formulas:

Operating profit is given as $23,716 million. Depreciation can be seen from the Cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more as is $5,267 million, while amortization is $877 million.

  • Calculation of Formula 1

EBITDA = 23716 + 5267 + 877 = $29,860 million

  • Calculation of Formula 2

So, EBITDA = 19478-434+4672+6144 = $29,860 million.

Example #4

Apple is an American multinational company developing consumer electronics products such as the iPhone, iPad, Mac, etc. Below is a snippet from the annual report of 2018:

Source: Apple Inc

We can see that in 2018 the company’s total revenue was $266 Bn, with a net income of around $59.5 billion. Therefore, using the above-given values, we will calculate EBITDA with both the formulas:

Operating profit is $70,898 million, and Depreciation and Amortization are $10,903 million.

EBITDA = 70898 + 10903 = $81,801 million

So, EBITDA = 59,531-2005+13372+10903 = $81,801 million.

Example #5

Berkshire Hathaway is an American multinational companyMultinational CompanyA multinational company (MNC) is defined as a business entity that operates in its country of origin and also has a branch abroad. The headquarter usually remains in one country, controlling and coordinating all the international branches. read more headquartered in Omaha. Renowned investor Warren Buffet funds it. Below is a snippet of the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more for 2018:

Source: Berkshire Hathaway

We can see that in 2018, the company’s total revenue was $23.855 Bn, with a net income of around $5,219 million. Therefore, using the above-given values, we will calculate EBITDA with both the formulas:

Formula #1: EBITDA = Operating profit + depreciation + amortization

In the above report, operating profit is not given directly, so we will calculate that by the given information.

Revenue = $23,855 million and operating expenses = $15,951 million

Operating Profit = Revenue – operating expenses

  • Operating Profit = 23855- 15951 = $7,904 million

And Depreciation and Amortization is $2,317 million.

EBITDA = 7904 + 2317 = $10,221 million

So, EBITDA = 5,219+1041+1644+2317 = $10,221 million.

Relevance and Uses

  • It is a profitability metric that helps assess how a company is performing, which is calculated by measuring profit before payment of interest to lenders or creditors, taxes to the government, and other non-cash expenses like depreciation and amortization. This is not a financial ratio but a profitability calculation measured in dollars and not in percentages like most other financial terms.However, the EBITDA’s limitation is that it is particularly useful when comparing similar companies in the same industry. Since the EBITDA equation only measures profit in terms of dollar amount, investors and other financial users usually find it difficult to use this metric to compare differently sized (small & medium enterprise, mid-corporate, and large corporate) companies across the industry.

EBITDA Calculator

You can use the following Calculator

EBITDA Calculation in Excel

Now let us take the real-life earnings before interest, tax, depreciation, and amortization example of Apple Inc.’s published financial statement for the last three accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more.

Based on publicly available financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more, the EBITDA (in dollar terms) of Apple Inc. can be calculated for the accounting years 2016 to 2018.

Here we have used the EBITDA equation i.e EBITDA = Net income + Interest expense + Taxes + Depreciation & Amortization expense.

From the table below, we can see that the earnings before the interest, tax, depreciation and amortization level of Apple Inc. in dollar terms have been growing, which is a positive sign for any company.

This has been a guide to the EBITDA formula. Here we learn how to calculate earnings before interest, tax, depreciation, and amortization using its formula and practical examples. Here we also provide you with EBITDA Calculator with a downloadable excel template –

  • LTM EBITDALTM EBITDALTM EBITDA (Last Twelve Months EBITDA) calculates the company’s earnings before taxes, interest, and amortization & depreciation of components for the past twelve consecutive months. It determines operating cash flow, helps in the valuation of a business.read moreEBITDAREBITDAREBITDAR (Earnings before interest, taxes, depreciation, amortization, and restructuring/rent) is a popular measure which is used to assess the company’s performance, this is not directly present on the income statement but can be calculated by using the information on the income statement by adding rent or restructuring costs to EBITDA.read moreEV to EBITDA MultipleEV To EBITDA MultipleEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read moreEBIT vs EBITDAEBIT Vs EBITDAEBIT signifies the operating profit the company makes before the inclusion of interest and tax expenses. In comparison, EBITDA determines the company’s overall operational profitability by summing the depreciation and amortization expenses to the operating profit.read more