## 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**

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

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 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.

### Steps to Calculate EBITDA

**Step 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 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 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 statements 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 company.

### EBITDA Calculation Example

#### Example #1

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

Source: jcpenney.com

We can see here that in 2017 the total revenue of the company was $12.5 Bn with a net loss of around $116 million.

- Calculation using Formula 1

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

**EBITDA** = 116 + 570 = $686 million

- Calculation using Formula 2

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:

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

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

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 venture 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:

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 statement as is $5,267 million, while amortization is $877 million.

- Calculation of Formula 1

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

- Calculation of Formula 2

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:

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

**EBITDA** = 70898 + 10903 = $81,801 million

- Calculation of Formula 2

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

#### Example #5

**Berkshire Hathaway** is an American multinational company headquartered in Omaha. It is founded by renowned investor Warren Buffet. Below is the snippet of the annual report of 2018:

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

**EBITDA** = 7904 + 2317 = $10,221 million

- Calculation of Formula 2

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 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 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.

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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 –