EBITDA is a measure of cash flow that aims to capture the profitability of a business before any financial decisions have been made. This metric is used by investors and analysts to determine the approximate value of a company.

EBITDA definition?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a measure of profitability that is used as a benchmark by investors to compare the performance of public companies.

The EBITDA margin (not to confuse it with EBIT) is a good indicator of the company’s ability to grow. For example, if a company has been growing its EBITDA margin by 8% per year, you can expect that the business will continue growing at this rate or faster.

How to calculate EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. If you wanted to compare two companies that make widgets but one manufactures its widgets in-house and the other outsource them from China (and therefore has higher manufacturing costs), you could use EBITDA as your basis for comparison since both companies are making widgets and selling them at identical prices.

EBITDA is calculated by adding together net income plus depreciation, amortization, and interest:

\text {EBITDA} = \text {Net Income} + \text {Depreciation} + \text {Amortization} + \text {Interest}

Understanding the EBITDA Formula

For example, say Company XYZ has a net income of $100 million in one year. Its total interest expense (cost of borrowing the money) is $10 million; depreciation equals another $10 million; taxes are another $15 million, and amortization (which occurs when assets are expensed over time rather than being fully capitalized) totals $5 million.

Because there were no other non-operating expenses during the year—no profit sharing or stock options awarded to executives or employees—it can be said that those numbers represent all costs necessary for running the business day-to-day: paying salaries, buying inventory and supplies needed on hand today so they can start selling tomorrow if customers come through like they did last year.

Limitations of EBITDA

EBITDA is a useful metric for many reasons, but it’s not a perfect measure of the value of a business. One limitation of EBITDA is that it excludes depreciation and amortization expense, as well as interest and taxes. Some people prefer to use operating income or net income instead because these numbers are closer approximations of cash flow from operations than EBITDA: they include depreciation and amortization, but not interest or taxes.

Another drawback to using EBITDA lies in its limitations as a measure of profitability; while it’s true that most companies are profitable, some companies would be unprofitable if they were forced to pay out all their earnings in taxes (i.e., their tax rate was 100 percent). In these cases (and others), investors should look at measures like net income per share instead.

It should also go without saying that EBITDA has nothing to do with growth; although some analysts report this statistic alongside other metrics like revenue growth or year-over-year earnings per share growth.

What is the EBITDA multiple?

You may have heard the term “EBITDA multiple” when talking about financial analysis. This is one of the most common ways analysts assess companies, and in this section, we’re going to explain what it means and why you should use it.

The EBITDA multiple is simply a ratio comparing enterprise value (EV) to EBITDA. Enterprise Value (EV) is calculated as the total market value of all shares outstanding plus any cash on hand minus any debt owed by the company. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Basically, it’s how much money a company made minus its operating costs before paying taxes or interest payments on debt – think “operating profit.”

For more information on this topic, you can check out our EBITDA multiple calculator!

How to use the EBITDA calculator

Our EBITDA calculator is pretty simple to use. You need to enter three values:

  • Operating profit – which is the profit obtained from all operations of the company (before deduction of interest or taxes)
  • Amortization expenses – represent essentially the cost of living or the cost of operation
  • Depreciation expenses – represent how much an asset has been used in a certain time period


How do you calculate EBITDA?

EBITDA is the sum of the operating profit, amortization expenses, and depreciation expenses.

Is EBITDA the same as gross profit?

Gross profit shows how much a company has earned after subtracting the production costs, and EBITDA is a show of a company’s profitability before taxes, interest, depreciation, and amortization.

What is the EBITDA multiple?

The EBITDA multiple is a financial ratio that compares a company’s enterprise value to its yearly EBITDA.