Glossary

EBITDA

Definition

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is operating profit with depreciation and amortization added back, used to compare the operating performance of businesses with different financing, tax positions and asset ages. It is a non-GAAP measure: IFRS and US GAAP do not define it.

How it works

EBITDA can be built from the bottom up (net income plus income tax, interest, depreciation and amortization) or from operating profit (EBIT plus depreciation and amortization). Lenders use it for leverage covenants such as debt divided by EBITDA, and buyers often price businesses as a multiple of it.

Its limits are real. EBITDA ignores the cash needed to replace equipment, the cash tied up in working capital and the interest that must be paid. A business with high EBITDA and heavy capital spending can still run out of cash, so read it next to the cash flow statement.

Formula

EBITDA = Net income + Income tax + Interest + Depreciation + Amortization

EBITDA = Operating profit (EBIT) + Depreciation + Amortization

EBITDA margin % = EBITDA / Revenue × 100

Example: calculating EBITDA

A manufacturer reports net income of 120,000, income tax of 30,000, interest of 20,000, depreciation of 45,000 and amortization of 5,000. EBITDA is 120,000 + 30,000 + 20,000 + 45,000 + 5,000 = 220,000. On revenue of 1,100,000 the EBITDA margin is 20%.

Related terms

Net income (net profit)
Net income is what remains of revenue after every expense for the period, including cost of sales, operating expenses, finance costs and income tax. It is the bottom line of the income statement and flows into retained earnings at year end.
Depreciation
Depreciation is the systematic allocation of the cost of a tangible fixed asset, less its residual value, over its useful life. Each period's charge is an expense credited to accumulated depreciation, so the asset's carrying amount falls over time.
Amortization
Amortization is the systematic allocation of the cost of an intangible asset with a finite useful life, such as software licences or patents, over that life. The term is also used for paying down a loan through scheduled instalments of principal and interest.
Gross profit
Gross profit is revenue minus the cost of goods sold. Divided by revenue it gives the gross margin, which shows how much of each sale is left to pay operating expenses and earn a profit.
Income statement (profit and loss)
The income statement reports revenue, expenses and the resulting profit or loss for a period. Presented by function, it shows revenue, cost of sales, gross profit, operating expenses and net profit.

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