How this calculator works
EBITDA adds depreciation and amortization back to operating profit. Both charges spread the cost of long-lived assets across many years, so neither is a cash outflow in the current period. Adding them back gives a proxy for the cash a business generates from operations before interest, taxes and capital spending. The measure is popular in leveraged finance and in valuation multiples because it is comparable across companies with different asset ages and financing. It is not a substitute for cash flow: it ignores working capital, capital expenditure, interest and taxes, all of which consume cash.
Formula
EBITDA = operating profit + depreciation + amortization. Operating profit = EBITDA - depreciation - amortization. Depreciation = EBITDA - operating profit - amortization. Amortization = EBITDA - operating profit - depreciation.
Worked example
Operating profit of $200,000 plus $40,000 of depreciation and $10,000 of amortization gives EBITDA of $250,000. To reach the same figure from operating profit, the two non-cash charges must be added back in full.
Advertisement
Frequently asked questions
Why do analysts use EBITDA?
It strips out financing, tax and accounting choices, so it is easier to compare companies. It is also the basis for common leverage tests: net debt divided by EBITDA estimates how many years of cash earnings it would take to repay debt.
What are the weaknesses of EBITDA?
It pretends depreciation is not a real cost, yet equipment must eventually be replaced. It also ignores working capital and capital spending, so two companies with the same EBITDA can have very different cash flow. Treat it as one input, not a verdict.
How does EBIT differ from EBITDA?
EBIT is after depreciation and amortization. EBITDA adds those two non-cash charges back. The gap between them shows how asset-heavy the business is: capital-intensive firms have a large gap.