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What is EBITDA? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about EBITDA.
What is EBITDA? Why is it important?
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a profitability metric that measures a company’s overall financial performance. Some investors use EBITDA instead of net income or simple earnings because it can provide better insight into a company’s operations by stripping away expenses that can hide performance. Additionally, EBITDA deducts capital and financing expenditures, making it a good metric to compare the profitability of companies and industries.
It’s important to remember that EBITDA is not part of the Generally Accepted Accounting Principles and thus can be calculated differently from company to company. In fact, some companies will even intentionally use EBITDA to hide their real performance.
How to calculate EBITDA with the right formula
(+) Earnings Before Taxes (EBT)
(+) Net Interest Expenses
(+) Other Non-operating Expenses
(+) Unusual Items
To calculate EBITDA you have to add back net interest expenses, other non-operating expenses, D&A, and unusual items to a company’s earnings before taxes (EBT). EBT, as well as the tax and interest figures, are reported on the income statement. D&A numbers can be found in the operating profit notes or on the cash flow statement. Some investors will calculate an unadjusted EBITDA by not including unusual items that act as one-time expenses.