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 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)`
A more simplified way to calculate EBITDA is to utilize Operating Profit (EBIT).
EBITDA = `p + d + a`
Let's consider Maxotek, a software company. It's yearly income statement is as follows:-
|Costs of goods sold||$30,000|
|Total operating expenses||($20,000)|
|Interests, Taxes, Depreciation & Amortization|
Using the above to calculate EBITDA:-