EBITDA calculator: What it measures and what it hides

EBITDA is earnings before interest, taxes, depreciation, and amortisation. Enter your operating profit and the depreciation and amortisation charges below, and the calculator returns it along with EBIT.

If your accounts start at the bottom line instead, switch the starting point to net income and it adds back interest and tax as well. Adding revenue gives you the EBITDA margin, which is the version most people actually compare across companies.

EBITDA is an attempt to isolate the operating performance of a business from the decisions and circumstances surrounding it.

Each letter after the E removes one source of difference between two otherwise comparable companies. Interest reflects how the business is financed rather than how it operates. Taxes reflect jurisdiction and structure. Depreciation and amortisation are non-cash charges reflecting past investment decisions and the accounting policies chosen for them.

Strip all four out and you have a rough measure of what the operations produce, comparable across two businesses with different debt loads, different tax positions, and different histories of capital spending. That comparability is why private equity, lenders, and acquirers reach for it constantly.

From operating profit, which is the shorter route:

EBITDA = Operating profit + Depreciation + Amortisation

From net income, which is the route you take when the accounts start at the bottom:

EBITDA = Net income + Interest + Taxes + Depreciation + Amortisation

Both arrive at the same number. A business with $1,850,000 of operating profit, $410,000 of depreciation, and $240,000 of amortisation has EBITDA of $2,500,000. The same business with $1,100,000 of net income, $320,000 of interest, and $430,000 of tax reaches $1,850,000 of EBIT and the same $2,500,000.

And the margin, which is the comparable version:

EBITDA margin = EBITDA ÷ Revenue

On $9,400,000 of revenue, that $2,500,000 is a 26.6% EBITDA margin.

The two get treated as one line and they describe different things.

Depreciation spreads the cost of a physical asset across its useful life. Buy a $500,000 machine expected to last ten years and $50,000 appears as an expense each year, even though the cash left in year one.

Amortisation does the same for intangibles: software, patents, customer lists, brand value recognised in an acquisition.

Neither involves cash moving in the period they appear. That is the justification for adding them back, and it is also where the argument starts.

The criticisms are well known, widely ignored, and correct.

Depreciation is not fake, it is deferred. The machine wears out and has to be replaced. Adding back depreciation treats a real, recurring cost as if it were an accounting artefact. Warren Buffett's objection is the sharpest version: does management think the tooth fairy pays for capital expenditure?

It flatters capital-intensive businesses most. The heavier the asset base, the larger the add-back, and the wider the gap between EBITDA and anything resembling cash. Airlines, telecoms, manufacturers, and streaming services all look substantially healthier on this measure than on any other.

It ignores working capital entirely. A business growing fast can post strong EBITDA while consuming cash in inventory and receivables. EBITDA is not cash flow, and the two can point in opposite directions for years.

It ignores the cost of debt. Adding back interest is defensible when comparing operations. It is not defensible when assessing whether the business can survive, because interest has to be paid whatever the comparison says.

"Adjusted EBITDA" is where the real damage happens. Every add-back on top of the standard four is a claim that a cost will not recur. Restructuring charges that appear every year, stock-based compensation that is a genuine cost of employing people, and one-off legal expenses in a business that is always in litigation are all common. Read the reconciliation, not the headline.

A negative EBIT can hide behind a positive EBITDA. A business with a $500,000 operating loss and $900,000 of depreciation reports $400,000 of EBITDA. It is losing money and the headline number is positive.

Given all that, it persists for reasons that are practical rather than theoretical.

The useful discipline is to read EBITDA and free cash flow together. When they track each other, EBITDA is a fair summary. When they diverge persistently, the gap is telling you exactly where the business's money is going, and it is almost always into capital expenditure or working capital.

Add depreciation and amortisation back to operating profit. With $1,850,000 of operating profit, $410,000 of depreciation, and $240,000 of amortisation, EBITDA is $2,500,000. Starting from net income instead, add back interest and tax as well.

EBIT is earnings before interest and taxes, which is operating profit after depreciation and amortisation have been charged. EBITDA adds those two back. The difference between them is exactly the D&A figure, and for a capital-intensive business it is large.

It varies enormously by sector, because the margin is largely a function of how asset-heavy the business is and how much of its cost base sits above the line. Software businesses run far higher margins than distributors or manufacturers. Compare against direct peers rather than against a general benchmark.

No, and treating it as such is the most common error made with it. EBITDA ignores working capital movements, capital expenditure, interest, and tax, all of which consume real cash. A business can report growing EBITDA while its bank balance falls.

EBITDA with further items added back, usually costs management argues are one-off or non-operating. Some adjustments are legitimate. Many are not, particularly when the same adjustment appears every year. Always read the reconciliation from the statutory figure.

Because businesses are bought, sold, and lent against on a multiple of it. It also strips out financing and tax differences, which makes two companies genuinely more comparable on operations. The criticism is not that it is useless, it is that it should never be the only number you look at.

Yes, and this is exactly when to be careful. A company with a $500,000 operating loss and $900,000 of depreciation reports $400,000 of EBITDA. Both figures are correct, and only one of them describes a business that is making money.