EBITDA
Earnings before interest, taxes, depreciation and amortization — a proxy for core operating cash generation.
Formula
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Example
NI $70k + $10k int + $20k tax + $15k D + $5k A = $120k
How it works
EBITDA is built by starting with net income and adding back financing costs, tax effects, and non-cash accounting charges. The idea is to strip out items that depend on capital structure, jurisdiction, or accounting allocation so you can better compare the operating earnings power of different businesses. It does not measure cash flow directly, but it is often used as a quick proxy for recurring operating performance before investment and financing decisions.
When to use it
Use EBITDA when comparing profitability across companies with different debt loads, tax situations, or depreciation policies, especially in valuations and operational benchmarking. It is also common in credit analysis and private equity because it helps isolate earnings from the core business before financing and non-cash accounting effects.
Worked example, step by step
Start with net income: $48,000 Add interest expense: + $12,000 Add tax expense: + $18,000 Add depreciation: + $30,000 Add amortization: + $8,000 EBITDA = 48,000 + 12,000 + 18,000 + 30,000 + 8,000 EBITDA = $116,000
Common mistakes to avoid
- Using EBITDA as if it were actual cash flow and ignoring working capital or capital expenditures
- Forgetting that interest, taxes, depreciation, and amortization are added back to net income, not subtracted
- Mixing up depreciation and amortization or omitting one of them when both are present
Did You Know?
Critics call EBITDA “earnings before the bad stuff” because it ignores real costs like interest and asset wear.
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