Earnings before interest, taxes, depreciation and amortization -- or EBITDA -- is a measure of a company's financial performance. It's not a metric that's defined in generally accepted accounting principles, but it is commonly used by managers, investors and creditors.
EBITDA is similar to net income but makes a few financial adjustments. It's revenue less expenses, but also excludes tax, interest, depreciation and amortization expense. Some analysts like to use use EBITA in lieu of net income because they see it to be a more "true" indicator of company's income potential. Depreciation and amortization are non-cash expenses, so managers like to exclude them to get a better sense of the business cash flow. The metric can help potential creditors get a better sense of what earnings are available before debt interest payments are made and can assist investors in comparing companies with different tax rates and capital structures.
To calculate EBITDA, add all company revenues and subtract all company expenses other than tax, interest, depreciation and amortization. Common revenues are product sales, service revenue, rent revenue and interest revenues. When figuring company expenses, include both operating and nonoperating expenses. Operating expenses can be sales returns, allowance for doubtful accounts, salaries, benefits, insurance, rent expense, utilities and marketing expense. Nonoperating expenses usually are associated with financing or investing activities. Some typical nonoperating expenses are amounts paid to brokers, bank charges and late-payment fees.
The difference between revenues and these expenses is EBITDA. For example, if total revenues are $50,000 and expenses other than tax, interest, depreciation and amortization are $30,000, EBITDA is $20,000.
Alternative EBITDA Calculation
If a business has many revenue and expense line-items, it may be simpler to calculate EBITDA from net income. To calculate EBITDA this way, start with the net income listed on the income statement and add back the amounts noted for tax, interest, depreciation and amortization.
For example, say that a company's net income is $8,000 and it lists $3,000 for tax expense, $2,000 for interest expense, $5,000 for depreciation and $2,000 for amortization. The sum of tax, interest, depreciation and amortization is $12,000. Add that $12,000 to the $8,000 of net income and you get EBITDA of $20,000.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.