EBITDA Formula

What is EBITDA Formula?

EBITDA (Earnings before interest, tax, depreciation, and amortization) formula, as the name indicates, is basically the calculation of the company’s profitability which can be derived by adding back interest expense, taxes, depreciation & amortization expense to net income. EBITDA is not represented in the income statement as a line item, rather EBITDA calculation has to be done by using the other already available items reported in every income statement.

Mathematically, it can be calculated using two methods

Method 1 – Starts with Net Income

  • EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization Expense

Method 2 – Starts with EBIT

Although the above formula is predominantly used in the calculation of earnings before interest, tax, depreciation, and amortization and will be discussed in detail in this article, there is another way for EBITDA calculation. In the second method, the calculation of EBITDA can be done by deducting all expenses from net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.read more other than interest expense, taxes, and depreciation expense. But this method is not a popular one, and hence it is not elaborated in this article.

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For eg:
Source: EBITDA Formula (wallstreetmojo.com)

Steps to Calculate EBITDA

Following are the steps to calculate EBITDA –

  1. It is very simple since the entire set of information required for its calculation is already contained in the income statement. The first step in the calculation of EBITDA from the income statement is to arrive at the operating profit or Earnings before Interest and TaxEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read moreEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more (EBIT). The data can be found in the income statementThe Data Can Be Found In The Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more after the depreciation & amortization expenses and selling, general & administrative (SG&A) expenses.

  2. Now that EBIT has taken out the depreciation and amortization expense in the income statement, it is required to add back the expense to assess the cash flow of the company. When these non-cash expenses are added to EBIT, it is then recognized as the earnings before interest, tax, depreciation, and amortization, which is the real amount of cash generated by the company operation. Various investors and users of financial statementsUsers Of Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers.read more use the EBITDA equation because they believe that non-cash expenses are not actual cash outflow and, as such, should be considered during the assessment of the real cash flow of the company. Consequently, it is considered that the EBITDA formula is the financial metric which reveals the true cash flow position of the companyCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read moreCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more.

EBITDA Calculation Example

You can download this EBITDA Formula Excel Template here – EBITDA Formula Excel Template

Example #1

J.C. Penny is American furniture, bedding, and department store company. Below is the screenshot of Income Statement of J.C. Penny:

EBITDA calculation example 1.1

Source: jcpenney.com

We can see here that in 2017 the total revenue of the company was $12.5 Bn with a net lossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read more of around $116 million.

  • Calculation using Formula 1
EBITDA calculation example 1.2

Operating Profit given as $116 million and Depreciation and Amortization is $570 million.

EBITDA = 116 + 570 = $686 million

  • Calculation using Formula 2
EBITDA calculation example 1.3

So, EBITDA = -116 +325 -126 +570 = $653 million.

Now you will notice some difference between the values of formula#1 and formula #2. The reason is that there is an exceptional item called “Loss on extinguishment of debt,” which is around $30 million that comes between Operating Income and Net Income, but we have not added that amount in our in Formula#2.

Example #2

Starbucks Corporation is a U. S. company founded in Seattle, which is in the coffee and coffeehouse chain business. Below is the screenshot of 2018 Income Statement of the corporation:

EBITDA calculation example 2.1

Source: Starbucks.com

We can see here that in 2018 the total revenue of the company was $24.7 Bn with a net income of around $4.5 billion. Using the above-given values, we will calculate EBITDA with both the formulas:

  • Calculation using Formula 1
EBITDA calculation example 2.2

Operating Profit given as $3,883 million and Depreciation and Amortization is $1,247 million.

EBITDA = 3383 + 1247 = $4,630 million

  • Calculation using Formula 2
EBITDA calculation example 2.3

Interest Expense = -$170.3 + 191.4 million = $21.1 million

So, EBITDA = 4518 +21.1 +1262 +1247 = $7,048 million.

The difference using formula#1 and formula #2 is because of some one-time expenses such as the acquisition of joint ventureJoint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more and divestiture of some operations which are not added back while calculating in formula #2.

Example #3

Google is a U.S. company that is in internet service and products business, such as a search engine.  Below is the snapshot of 2018 Annual report:

EBITDA calculation example 3.1

Source: Google

We can see here that in 2016 the total revenue of the company was $90.3 Bn with a net income of around $19.5 billion. Using the above-given values, we will calculate EBITDA with both the formulas:

Operating Profit is given as $23,716 million. Depreciation can be seen from the Cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.read more as is $5,267 million, while amortization is $877 million.

  • Calculation of Formula 1
EBITDA calculation example 3.2

EBITDA = 23716 + 5267 + 877 = $29,860 million

  • Calculation of Formula 2
EBITDA calculation example 3.3

So, EBITDA = 19478-434+4672+6144 = $29,860 million.

Example #4

Apple is an American multinational company that develops consumer electronics products such as the iPhone, iPad, Mac, etc. Below is a snippet from the annual report of 2018:

EBITDA calculation example 4.1

Source: Apple Inc

We can see here that in 2018 the total revenue of the company was $266 Bn with a net income of around $59.5 billion. Using the above-given values, we will calculate EBITDA with both the formulas:

Operating Profit given as $70,898 million and Depreciation and Amortization is $10,903 million.

  • Calculation of Formula 1
Example 4.2

EBITDA = 70898 + 10903 = $81,801 million

  • Calculation of Formula 2
Example 4.3

So, EBITDA = 59,531-2005+13372+10903 = $81,801 million.

Example #5

Berkshire Hathaway is an American multinational companyMultinational CompanyA multinational company (MNC) refers to that business entity whose headquarter is in one country, and its branches or subsidiaries extend across the globe in two or more nations. The MNCs aim at maximum revenue generation by spreading business worldwide.read more headquartered in Omaha. It is founded by renowned investor Warren Buffet. Below is the snippet of the annual report of 2018:

Berkshire Hathaway Annual Report

Source: Berkshire Hathaway

We can see here that in 2018, the total revenue of the company was $23.855 Bn with a net income of around $5,219 million. Using the above-given values, we will calculate EBITDA with both the formulas:

Formula #1: EBITDA = Operating profit + depreciation + amortization

In the above report operating profit is not given directly, so we will calculate that by the given information.

Revenue = $23,855 million and operating expenses = $15,951 million

Operating Profit = Revenue – operating expenses

  • Operating Profit = 23855- 15951 = $7,904 million

and Depreciation and Amortization is $2,317 million.

  • Calculation of Formula 1
Example 5.2

EBITDA = 7904 + 2317 = $10,221 million

  • Calculation of Formula 2
Example 5.3

So, EBITDA = 5,219+1041+1644+2317 = $10,221 million.

Relevance and Uses

  • It is basically a profitability metric that helps to assess how a company is performing, which is calculated by measuring profit before payment of interest to lenders or creditors, taxes to the government, and other non-cash expenses like depreciation and amortization. This is not a financial ratio, rather a profitability calculation which is measured in terms of dollars and not in percentages like most other financial terms.
  • However, there remains a limitation of the EBITDA that it is particularly useful when comparing similar companies in the same industry. Since the EBITDA equation only measures profit in terms of dollar amount, investors and other financial users usually find it difficult to use this metric to compare differently sized (small & medium enterprise, mid-corporate, and large corporate) companies across the industry.

EBITDA Calculator

You can use the following Calculator

Net Income
Interest Expense
Taxes
Depreciation & Amortization Expense
EBITDA Formula =
 

EBITDA Formula = Net Income + Interest Expense + Taxes + Depreciation & Amortization Expense
0 + 0 + 0 + 0 = 0

EBITDA Calculation in Excel

Now let us take the real-life earnings before interest, tax, depreciation, and amortization example of Apple Inc.’s published financial statement for the last three accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more.

EBITDA Formula in Excel Example 1

Based on publicly available financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more, the EBITDA (in dollar terms) of Apple Inc. can be calculated for the accounting years 2016 to 2018.

Here we have used the EBITDA equation i.e EBITDA = Net income + Interest expense + Taxes + Depreciation & Amortization expense

earnings before interest and taxes Example

From the below table, we can be seen that the earnings before interest, tax, depreciation, and amortization level of Apple Inc. in dollar terms have been growing during the period, which is a positive sign for any company.

earnings before interest and taxes calculation in excel

Recommended Articles

This has been a guide to the EBITDA formula. Here we learn how to calculate earnings before interest, tax, depreciation, and amortization using its formula along with practical examples. Here we also provide you with EBITDA Calculator with downloadable excel template –

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