When to use the EBITDA calculator
Business owners usually meet EBITDA when a lender looks at how much debt the business can carry, when a buyer discusses what the business is worth, or when they want to compare operating results from year to year without the effect of how the business is financed and how its equipment is depreciated.
A result of $120,000 means the business earned $120,000 from its operations before interest, income tax, depreciation and amortization were charged. It is an earnings figure, not the cash the business generated.
Two ways to build it up
Choose the mode that matches the figures you have:
- From net income: start with the bottom line of the income statement and add back interest expense, income tax expense, depreciation and amortization. This is the stricter version, because the US Securities and Exchange Commission treats EBITDA as based on net income.
- From operating income (EBIT): start with operating profit, which is already before interest and tax, and add back depreciation and amortization. Use it when operating income is the figure you have.
Why the two results can differ
The two build-ups give the same answer only when everything between operating income and net income is interest expense and income tax. Many businesses also have items below operating profit, such as other income, interest earned, gains or losses on selling assets, or results from discontinued operations. The net income build-up keeps those items in EBITDA, and the operating income build-up leaves them out. If your two results differ, the gap equals those items. Say which build-up you used whenever you share the figure.
What EBITDA is not
- It is not a standard accounting measure. Neither US GAAP nor IFRS defines EBITDA, so it is a non-GAAP measure and businesses can calculate it differently. A figure with further adjustments, such as removing one-off costs, should be called adjusted EBITDA.
- It is not cash flow. It ignores spending on equipment and other long-lived assets, cash tied up in inventory and receivables, and the interest and tax actually paid. A business can report positive EBITDA and still run short of cash.
- Depreciation is still a real cost. Equipment wears out and has to be replaced, so for a business that relies on expensive equipment, EBITDA can overstate what is left for owners and lenders.
Common mistakes
- Entering profit before tax as operating income. Profit before tax is already after interest, so EBITDA comes out too low.
- Entering the tax paid in cash instead of the income tax expense shown on the income statement.
- Missing depreciation or amortization that is included in cost of sales rather than shown as a separate line. The cash flow statement or the notes usually show the full amounts.
- Calling an adjusted figure EBITDA. Lenders and buyers will want to see each adjustment and why it was made.
- Treating EBITDA as the cash available to repay debt or pay owners.
Related tools
EBITDA margin divides EBITDA by revenue, so you can compare years with different sales. Lenders often use EBITDA as the income figure in the business version of the debt service coverage ratio. EV/EBITDA compares the value of a whole business, debt included, with its EBITDA. For the difference between the two earnings measures, see EBIT vs EBITDA.