What is EBITDA?

‍

Earnings Before Interest, Tax, Depreciation, and Amortization is a standard measure used to assess a company’s profitability and performance. EBITDA adds taxes, interest, depreciation and amortization back to Net Income, allowing investors and analysts to isolate the operational performance of a company by excluding costs that may obscure underlying profitability.

EBITDA is commonly used to evaluate performance in asset-intensive industries where property, plant and equipment make up a large portion of non-cash depreciation costs. Manufacturing, energy, transportation and mining industries, for example, require a significant amount of capital to acquire, maintain, and, eventually, replace fixed assets. Depreciation is a method of writing off the cost of fixed assets throughout the asset’s useful life.

‍

EBITDA is commonly used to evaluate performance in industries with high amortization, where there is high investment in intellectual property (i.e. non-intangible assets). Software and technology, pharmaceutical and biotechnology, entertainment, and media industries, for example, devote a large amount of capital to purchasing and developing intangible assets. Amortization is a method of writing off the cost of intangible assets throughout the asset’s useful life.

‍

Fluctuations in Tax Liabilities and assets included on an income statement may be unrelated to operational performance. Interest costs are variable and depend on debt levels, interest rates and management preferences on capital structure.  

\[\text{EBITDA} = \text{Net Income} + \text{Interest Expense} + \text{Depreciation & Amortization}\]

‍

Calculating EBITDA

‍

Investors and analysts use EBITDA in competitive benchmarking to compare companies across industries, particularly those with varying capital structures or tax environments. High EBITDA margins signal strong operational efficiency, while low EBITDA margins may indicate issues with cost control or revenue generation.  

For example, Company A generates $300 million in revenue and incurs $60 million in cost of goods sold and another $20 million in selling and general administrative costs. Depreciation and amortization expenses total $20 million; interest expense is $10 million, and the corporate tax rate is 20%. If depreciation, amortization, interest, and taxes are added back to net income, EBITDA equals $220 million.

The calculation of EBITDA for this example is as follows:

$300MM - ($60MM + $20MM) (earnings minus COGS and SG&A) = $220MM

minus $20MM (depreciation and amortization) = $200MM in operating profit

minus $10MM (interest) = $190MM in pre-tax income

minus $38MM (tax, as 20% of pretax income) = $152 in Net Income

plus $20MM plus $10MM plus $38MM (interest, tax, depreciation, and amortization) = $220MM in EBITDA

‍

This same method can be used to calculate EBITDA over an annual or quarterly period.