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.
