EBITDA

EBITDA stands for earnings before interest, taxes, depreciation

and amortization. EBITDA is one of the indicator of a
company's financial performance.

EBITDA is Calculated as

EBITDA = Operating Profit + Depreciation Expense + Amortization Expense

The more simple formula for EBITDA is:

EBITDA = Net Profit + Interest +Taxes + Depreciation + Amortization

EBITDA is essentially net income with interest, taxes, depreciation and

amortization added back to it. EBITDA can be used to analyze and compare
profitability between companies and industries because it eliminates the effects of
financing and accounting decisions. EBITDA is often used in valuation ratios and
compared to enterprise value and revenue.

EBITDA is calculated by adding back the non-cash expenses

of depreciation and amortization to a firm's operating income

EBITDA = EBIT + Depreciation + Amortization

Let's take a look at a hypothetical income statement for Company XYZ:

To calculate EBITDA, we find the line items for EBIT ($750,000), depreciation
($50,000) and amortization (n/a) and then use the formula above:

EBITDA = 750,000 + 50,000 + 0 = $800,000

A professional investor contemplating a change to the capital structure of a firm

(e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings
potential (reflected by earnings before interest, taxes, depreciation and
amortization (EBITDA) and EBIT), and then determines the optimal use of debt vs.
equity.

To calculate EBIT, expenses (e.g. the cost of goods sold, selling and administrative
expenses) are subtracted from revenues. Net income is later obtained by
subtracting interest and taxes from the result.