The EBITDA formula
EBITDA is net income plus interest, taxes, depreciation and amortization: EBITDA = net income + interest + taxes + depreciation + amortization. The net income is the bottom line of the income statement — what is left after every cost. The interest is what the business pays its lenders. The taxes are what it pays the government. The depreciation is the accounting charge for equipment wearing out. The amortization is the same charge for intangible assets, like patents and licences. Add the four back to the net income and you have the EBITDA. Try the numbers on the EBITDA calculator and it does the adding for you.
Step 1: find the net income
Start with the bottom line. The net income is the profit left after every cost the business paid in the period — wages, rent, materials, interest, taxes, depreciation and amortization. Find it on the income statement. Here is the worked example: net income of $42,000. The net income is a flow, not a stock — it covers a year, a quarter, or whatever period the add-backs cover, and the two must cover the same period, or the EBITDA means nothing.
Step 2: add back the interest and the taxes
Interest and taxes are financing and government costs, not the cost of running the business day to day — so they come back. Find the interest on the income statement and the taxes beside it. Here is the worked example: interest of $6,000 and taxes of $9,000. Add them to the net income: $42,000 + $6,000 + $9,000 = $57,000 so far.
Step 3: add back the depreciation and the amortization
Depreciation and amortization are accounting charges, not cash the business paid out in the period — so they come back too. Find the depreciation and amortization on the cash flow statement. Here is the worked example: depreciation of $18,000 and amortization of $4,000. The four add-backs together are $6,000 + $9,000 + $18,000 + $4,000 = $37,000.
Step 4: add it up
Add the add-backs to the net income. Here is the worked example: $42,000 + $37,000 = $79,000. So the EBITDA is $79,000 — the business kept $79,000 of operating profit before interest, taxes, depreciation and amortization. The answer is a dollar figure — write it as $79,000.
Three worked examples
Example one — the headline numbers. A business has net income of $42,000, interest of $6,000, taxes of $9,000, depreciation of $18,000 and amortization of $4,000. The add-backs are $37,000, and the EBITDA is $42,000 + $37,000 = $79,000.
Example two — a smaller business. A business has net income of $12,000, interest of $3,000, taxes of $2,000, depreciation of $8,000 and amortization of $1,000. The add-backs are $14,000, and the EBITDA is $12,000 + $14,000 = $26,000.
Example three — working to a target. A business wants an EBITDA of $100,000 and it already has $37,000 of add-backs. The net income it needs is $100,000 − $37,000 = $63,000. The EBITDA calculator runs the target check for you.
One reverse to check your answer
Work the numbers backwards. A business wants its EBITDA to reach $100,000, and it has $37,000 of add-backs. The net income it needs is $63,000. A dollar less, and the EBITDA falls short of the $100,000 target. The EBITDA calculator runs the reverses for you.
Net income vs EBITDA
The net income is what the business kept after every cost — the bottom line of the income statement — while the EBITDA is what the business kept before interest, taxes, depreciation and amortization. Here is the worked example: net income of $42,000 and EBITDA of $79,000 — the add-backs are the $37,000 between them. Find the net income on the income statement, and the depreciation and amortization on the cash flow statement. The net income is the profit, the EBITDA is the operating profit — and the add-backs are the gap between them.
What a $79,000 EBITDA means
A $79,000 EBITDA means the business kept $79,000 of operating profit before interest, taxes, depreciation and amortization. Here is the worked example: $42,000 of net income plus $37,000 of add-backs is a $79,000 EBITDA. A $79,000 EBITDA is neither good nor bad on its own — the industry decides what that profit means. Compare it with the same industry, not with the market as a whole. A business with strong pricing power can justify a higher EBITDA than one that competes on price.
What a $100,000 target means
A $100,000 target means the business wants $100,000 of operating profit before interest, taxes, depreciation and amortization. Here is the worked example: the net income needed for a $100,000 EBITDA is $63,000 with $37,000 of add-backs. A $100,000 target is a bigger profit than a $79,000 EBITDA — the business keeps more before interest, taxes, depreciation and amortization. Whether that profit is fair depends on the pricing power and the costs the business runs with.
Why EBITDA is not cash flow
EBITDA is not cash flow: it ignores the capital expenditure the business needs to keep running, so a high EBITDA built on a capital-hungry business flatters it — a business that must spend heavily on equipment can look profitable on EBITDA while its free cash flow is thin. It also ignores interest and tax, so a business loaded with debt can show strong EBITDA while its lenders take most of it. Use the EBITDA next to the free cash flow, and say which profit you used. Never mix them: a profit before interest, taxes, depreciation and amortization against one on free cash flow is two different measures. Read the guide to the EBITDA margin and the guide to enterprise value to EBITDA for the other side of the same accounts.
The mistakes to avoid
Four mistakes catch almost everyone. First, mixing periods: the net income and the add-backs must cover the same period, or the EBITDA means nothing. Second, forgetting an add-back: leave out the amortization and the EBITDA comes out short. Third, adding back the wrong thing: only interest, taxes, depreciation and amortization come back — wages, rent and materials stay in. Fourth, treating EBITDA as cash: it is not cash flow, and a business with strong EBITDA can still be short of cash. Check each one before you trust the number.