EBITDA Formula (Examples, Equation) | Easy Guide To Calculate EBITDA

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EBITDA Formula (Table of Contents)

What is EBITDA Formula?
Example of EBITDA Formula
EBITDA Calculator
EBITDA Formula in Excel (with excel template)

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

Method 2 – Starts with EBIT

EBITDA Formula + EBIT + Depreciation & Amortization Expense
or EBITDA = EBT + Interest Expense + Depreciation & Amortization Expense

Although the above formula is the predominantly used in the calculation of EBITDA 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 sales 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.

Example of EBITDA Formula

Let us consider an example of EBITDA calculation for a company called XYZ Limited. XYZ Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Limited has earned $150,000 in total net sales along with the following expenses.

Salaries: (+) $50,000
Rent: (+) $20,000
Cost of Goods Sold: $70,000

Again,

Net sales: (+) $150,000
Cost of Goods Sold: (-) $70,000
Interest expense: (-) $10,000
Depreciation expense: (-) $25,000
Taxes: (-) $4,000
Net income: $41,000

XYZ Limited’s net income at the end of the financial year stood at $41,000.

Now, the calculation of EBITDA can be done as,

EBITDA = Net income + Interest expense + Depreciation expense
= $41,000 + $10,000 + $25,000
= $76,000

Explanation of the EBITDA Formula

EBITDA Equation can be determined by the following two simple steps:

Step 1

The formula for EBITDA, in fact, 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 Tax (EBIT). The data can be found in the income statement after the depreciation & amortization expenses and selling, general & administrative (SG&A) expenses.

Step 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 EBITDA which is the real amount of cash generated by the company operation. Various investors and users of financial statements use EBITDA equation because they believe that non-cash expenses are not actual cash outflow and as such should be considered during 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 company.

Relevance and Uses of EBITDA formula

EBITDA formula 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 equation 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 EBITDA 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 Formula in Excel (with excel template)

Now let us take the real-life EBITDA example of Apple Inc.’s published financial statement for the last three accounting periods.

Based on publicly available financial information 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

From the below table, we can be seen that the EBITDA level of Apple Inc. in dollar terms has been growing during the period which is a positive sign for any company.

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

EBITDA Formula