EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company’s profitability that focuses on its core operating performance. By excluding non-operating expenses like interest, taxes, depreciation, and amortization, EBITDA aims to provide a clearer picture of how a business is performing operationally, without the influence of its capital structure or accounting policies related to asset depreciation.

How is EBITDA Calculated?

EBITDA can be calculated by starting with Operating Profit (or EBIT) and adding back Depreciation and Amortization

$\text{EBITDA} = \text{Operating Profit (EBIT)} + \text{Depreciation} + \text{Amortization}$

Alternatively, you can start with Net Income and add back Interest, Taxes, Depreciation, and Amortization:

$\text{EBITDA} = \text{Net Income} + \text{Interest} + \text{Taxes} + \text{Depreciation} + \text{Amortization}$

What is EBITDA Useful For?

EBITDA is often used to assess a company’s profitability from its core operations, eliminating non-cash expenses and the effects of financing and tax strategies. It’s particularly helpful when comparing companies with different capital structures, as it removes the variability introduced by interest expenses and taxes.

EBITDA is widely used in valuations (e.g., EV/EBITDA multiples) and is a preferred metric in industries with heavy capital investment, such as manufacturing or telecoms, where depreciation can obscure true operating performance.