Related Business & Finance Calculators
What is EBITDA and Why is it Used?
EBITDA stands for **E**arnings **B**efore **I**nterest, **T**axes, **D**epreciation, and **A**mortization. It is a widely used metric to assess a company's core operational profitability without the influence of accounting and financing decisions.
By adding back non-cash expenses like Depreciation and Amortization, as well as costs related to financing structure (Interest) and jurisdiction (Taxes), EBITDA provides a "cleaner" view of a company's ability to generate cash from its primary business operations. It's often used to compare the performance of different companies within the same industry and in business valuation (e.g., EV/EBITDA multiple).
How to Use the EBITDA Calculator
- Enter Net Income: Start with the company's bottom line, the Net Income, from its income statement.
- Add Back Non-Cash & Financing Costs: Input the amounts for Interest, Taxes, Depreciation, and Amortization. These figures can also be found on the income statement and cash flow statement.
- Enter Total Revenue: To calculate the EBITDA Margin, you also need the company's Total Revenue.
- Calculate: See the resulting EBITDA and EBITDA Margin percentage.
The EBITDA Formula
Frequently Asked Questions (FAQ)
What are the limitations of EBITDA?
While useful, EBITDA has significant limitations. It ignores changes in working capital, which is crucial for a company's liquidity. It also ignores the real cash cost of replacing old equipment (capital expenditures), which depreciation is meant to account for. Legendary investor Warren Buffett famously said, "Does management think the tooth fairy pays for capital expenditures?". Therefore, EBITDA should never be the only metric used to evaluate a company.
What is the difference between Depreciation and Amortization?
Both are non-cash expenses used to spread the cost of an asset over its useful life. **Depreciation** is used for tangible assets like buildings, machinery, and vehicles. **Amortization** is used for intangible assets like patents, copyrights, and trademarks.