- What does EBITDA mean?
EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization is a metric to find out how efficiently a business is operating.
EBITDA is calculated by subtracting the expenses from the company's revenue. Interest and taxes are excluded from the expenses by adding them back to our calculation. This figure is our EBIT. Adding back depreciation and amortization expenses to EBIT gives us our resultant EBITDA.
EBITDA is a variation of EBIT which does not exclude Depreciation and Amortization from the calculation.
- EBITDA Formula (extended)
EBITDA calculation starts with the gross profit. Operating costs such as Costs of goods sold (COGS) are subtracted from the gross profit. Any expenses incurred to raise business capital and tax liabilities is excluded from the calculation. Finally, depreciation and amortization expenses are added back to the calculation.
EBITDA = `r - (c + e) + (d + a)`
- r = total revenue
- c = costs of goods sold cogs
- e = total expenses
- d = depreciation expense
- a = amortization expense
- EBITDA Formula (simple)
A more simplified way to calculate EBITDA is to utilize Operating Profit (EBIT).
EBITDA = `p + d + a`
- p = Operating Profit or EBIT
- i = Depreciation Expenses
- t = Amortization Expenses
Let's consider Maxotek, a software company. It's yearly income statement is as follows:-
Revenue Total revenue $200,000 Costs of goods sold $30,000 Gross profit ($170,000) Operating expenses Salaries 10,000 Utilities 5,000 Rent 3,000 Depreciation 2,000 Total operating expenses ($20,000) EBIT $150,000 Interests, Taxes, Depreciation & Amortization Interests $50,000 Taxes $20,000 Depreciation $10,000 Amortization $5,000 Total exclusions ($85,000) Net profit ($65,000)
Using the above to calculate EBITDA:-
- `r - (c + e) + (d + a)`
- `200000 - (30000 + 20000) + (10000 + 5000)`
- `200000 - 50000 + 15000`
- `150000 + 15000`
- EBITDA = `165,000`
- Feb 12, 2019
- Calculation formula breakdown
- May 22, 2018
- Tool Launched