How To Calculate EBITDA in 5 Steps (With Examples)
How To Calculate EBITDA in 5 Steps (With Examples)
Answer: Calculating EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) involves several steps. Here’s a breakdown of the process in five steps, along with examples:
Step 1: Start with Net Income
Net Income is typically the first financial figure you need to calculate EBITDA. It can be found on the income statement of a company. Let’s assume a company has a Net Income of $500,000.
Step 2: Add Back Interest Expense
Interest Expense represents the interest paid on loans or debt. To calculate EBITDA, add back the interest expense to Net Income. Let’s say the company’s Interest Expense is $50,000.
EBITDA = Net Income + Interest Expense
EBITDA = $500,000 + $50,000
EBITDA = $550,000
Step 3: Add Back Taxes
Taxes paid by a company are not included in EBITDA because they vary depending on tax laws and jurisdictions. Add back the taxes to the EBITDA calculated in Step 2. If the company’s Tax Expense is $100,000, the calculation would be as follows:
EBITDA = EBITDA + Tax Expense
EBITDA = $550,000 + $100,000
EBITDA = $650,000
Step 4: Add Back Depreciation
Depreciation is a non-cash expense that accounts for the wear and tear of long-term assets. It is added back to EBITDA since it doesn’t represent actual cash outflows. Assume the company’s Depreciation Expense is $200,000.
EBITDA = EBITDA + Depreciation Expense
EBITDA = $650,000 + $200,000
EBITDA = $850,000
Step 5: Add Back Amortization
Amortization is similar to depreciation but specifically relates to intangible assets such as patents or copyrights. Add the Amortization Expense to the EBITDA calculated in Step 4. Let’s assume the company’s Amortization Expense is $50,000.
EBITDA = EBITDA + Amortization Expense
EBITDA = $850,000 + $50,000
EBITDA = $900,000
Therefore, the EBITDA of the company would be $900,000.
It’s important to note that EBITDA is a non-GAAP (Generally Accepted Accounting Principles) measure and has its limitations. It can provide an overview of a company’s operational profitability but does not include certain important factors like capital expenditures, changes in working capital, and other non-operating expenses.