EBITDA: Definition, Formula, and How to Calculate It
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a proxy for operating profitability before non-cash and financing items. Measures operating performance across companies and industries.
Exact formula
Some sources start from Net Income and add back Interest and Taxes instead. Use consistently across peer comparisons.
Notes
- EBITDA excludes capital expenditures and working capital needs.
- Useful for cross-company profitability comparisons but can be misleading if used as a cash measure.
- Investors commonly use EBITDA to compare operating performance across companies and industries because it removes differences in capital structure and tax treatment.
- Should not be treated as a substitute for free cash flow or net income.
Why it matters
EBITDA measures a company's operating profitability by showing earnings generated from core operations before the effects of financing decisions, tax regimes, and non-cash accounting charges. It is particularly useful for comparing companies with different capital structures, tax rates, and depreciation policies.