EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's profit from core operations before financing decisions, tax, and non-cash charges, calculated as Net Income + Interest + Taxes + Depreciation + Amortization. It's a popular proxy for operating cash generation.
What Is EBITDA?
EBITDA shows how much a company earns from its regular business activities, stripping out four things that vary by capital structure and accounting choices: interest on debt, taxes, depreciation, and amortization. By removing them, EBITDA lets you compare the underlying operating performance of companies with very different financing and tax situations.
EBITDA Formula
EBITDA = Net Income + Interest + Taxes + Depreciation + AmortizationAdd back to net income
You can also build it from the top down: EBITDA = Operating Income (EBIT) + Depreciation + Amortization.
What EBITDA Includes vs Excludes
| Included (core operations) | Excluded (added back) |
|---|---|
| Revenue | Interest on debt |
| COGS | Taxes |
| Operating expenses | Depreciation |
| - | Amortization |
EBITDA vs EBIT vs Net Income
| Metric | Adds back vs net income |
|---|---|
| Net income | Nothing (the bottom line) |
| EBIT | Interest + taxes |
| EBITDA | Interest + taxes + depreciation + amortization |
The key difference: EBIT keeps depreciation and amortization; EBITDA adds them back. EBITDA sits highest, EBIT in the middle, net income at the bottom.
Why EBITDA Matters (and Its Limits)
- Core-operations focus: isolates operating performance from financing and accounting.
- Comparability: useful for comparing companies with different debt or tax profiles.
- Cash proxy, imperfect: it ignores working-capital changes and CapEx, so it can overstate true cash generation.
- Can flatter: by excluding real costs (interest, asset wear), EBITDA can make a company look more profitable than it is.
EBITDA FAQ
What does EBITDA stand for?
Earnings Before Interest, Taxes, Depreciation, and Amortization, profit from core operations before those four items are subtracted.
How do you calculate EBITDA?
Start from net income and add back interest, taxes, depreciation, and amortization: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Or add depreciation and amortization back to EBIT.
What's the difference between EBIT and EBITDA?
Both exclude interest and taxes. EBIT still includes depreciation and amortization; EBITDA adds them back. EBITDA is therefore always equal to or higher than EBIT.
Is EBITDA the same as cash flow?
No. EBITDA is often used as a cash-flow proxy, but it ignores working-capital changes and capital expenditures. Operating cash flow is the more accurate cash measure.
