If you’ve ever peeked into a company’s finances or watched an episode of Shark Tank, you might’ve heard the term EBITDA tossed around. But what exactly is it, and why do investors love it so much?
Let’s break it down in a simple, stress-free way!
Table of Contents
🙋 What is EBITDA?
EBITDA stands for:
Earnings Before Interest, Taxes, Depreciation, and Amortization
In plain English, it tells you how much profit a business makes from its core operations, before factoring in expenses like loans, taxes, and accounting for aging equipment.
✨ Why Use EBITDA?
EBITDA is a great way to:
- Compare profitability between businesses in the same industry
- Evaluate operational performance
- Get a clearer picture of cash flow from core operations
It removes the “noise” of different tax rates, debt structures, and accounting methods.
🧾 EBITDA Formula
Here’s the basic formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
If you’re starting with Operating Income (EBIT), you can also use:
EBITDA = EBIT + Depreciation + Amortization
Let’s see it in action 👇
⚙️ Example: EBITDA in Action
Let’s say a company has:
- Net Income: $50,000
- Interest: $10,000
- Taxes: $8,000
- Depreciation: $5,000
- Amortization: $2,000
EBITDA = 50,000 + 10,000 + 8,000 + 5,000 + 2,000 = $75,000
That means this business earned $75,000 from its core operations, before extra costs were factored in.
Explanation of each term in EBITDA
💰 Earnings (Net Income)
This is the profit a business makes after all its expenses have been subtracted from its total revenue.
Think of it as the “bottom line” – what’s left over at the end of the day.
📌 Example:
If a company earns $100,000 in revenue and spends $80,000 on salaries, rent, and supplies, its net income is $20,000.
💸 Interest
This is the cost of borrowing money. If a business has loans or lines of credit, it pays interest on those.
EBITDA ignores interest so you can see how the business performs before debt costs come into play.
📌 Example:
If your company pays $5,000 in loan interest each year, this gets added back to net income in the EBITDA calculation.
🏛️ Taxes
These are the income taxes paid to the government. Taxes can vary a lot depending on location and tax laws.
By excluding taxes, EBITDA lets you compare businesses on a more even playing field, regardless of where they’re based.
📌 Example:
If a company pays $10,000 in taxes, add this amount back when calculating EBITDA.
🏗️ Depreciation
This is an accounting way to spread the cost of physical assets (like buildings, machinery, or computers) over their useful life.
It doesn’t affect cash flow directly, but it lowers accounting profits. EBITDA adds it back to show actual cash earnings.
📌 Example:
If your equipment depreciates by $8,000/year, that gets added back in the EBITDA formula.
🧾 Amortization
Similar to depreciation, but it applies to intangible assets like patents, copyrights, or goodwill.
It’s a non-cash expense, so it’s also added back to give a clearer view of core business performance.
📌 Example:
If you’re amortizing a software license worth $3,000 per year, that’s part of the EBITDA calculation too.
✅ Summary Formula
EBITDA =
Net Income
- Interest
- Taxes
- Depreciation
- Amortization
This gives a clearer picture of a business’s true operating profitability – without being clouded by tax rules, loan costs, or accounting methods.
📘 Final Thoughts
EBITDA gives you a powerful peek at a company’s operating health. While it’s not the full financial story (because it leaves out debt and capital costs), it’s a handy tool in any business owner’s or investor’s toolbox.
Use the calculator above anytime you need a quick EBITDA check — and keep the infographic handy as your cheat sheet!