Find Your Business’s EBITDA Calculation
Earnings before interest, taxes, depreciation, and amortization, or EBITDA for short, is a measurement commonly used by businesses to calculate the company’s operational performance. By assessing and examining their earnings without using variables like taxes or interest, businesses can more readily compare the results of their analysis with other businesses in the same industry.
To calculate the EBITDA, you would need to review a current income statement for the period you will be assessing. You may also require the cash flow statement for the same period as the income statement to identify the depreciation and amortization.
To locate your operating profit, you will need to review and analyze the income statement or profit and loss statement. The operating profit will reflect the revenue less cost of goods sold and the expenses. The profit and loss statement (P&L) does not take into consideration the tax and the interest expenses like the net income does. What the profit and loss statement does take into account is the depreciation and amortization, which will then be added back into the EBITDA calculator to calculate. You will need to refer to your cash flow statements to figure out the depreciation and the amortization, and those numbers will be needed to add into the EBITDA calculator.
Your company’s earnings before interest, taxes, depreciation, and amortization will be the ensuing dollar amount received.
But what is EBITDA? The EBITDA calculation is most often used by investors and business owners to compare businesses that are alike or the same. This measurement is also used by businesses to observe how proficiently their business is running.
There are multiple factors that can affect the resulting dollar amount, such as location and the debt structure. The tax rates can be significantly lower or higher than other provinces as well. Therefore, two companies or businesses that are exactly alike may vary considerably in their profits due to these factors. Using the EBITDA formula helps by taking out these factors, which, as a result can give business owners a more accurate comparison in terms of the actual business.
EBITDA Formula Equation
There are two formulas that can be used for your business EBITDA calculation.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Calculation begins at the end number of the income or net statement. If starting with the net income, you must add back in the interest and tax line items. The depreciation and amortization expenses also need to be added in. These numbers are found in the cash flow statement.
EBITDA = Operating Profit + Depreciation + Amortization.
This formula starts in the middle of your income statement with your operating profit – which reflects the total revenue minus the cost of goods sold (COGS) and the operating expenses. In this formula, the tax and interest expenses are already excluded, so all that is left to add on is the depreciation and amortization.
The end result, regardless of what formula is employed ends with the same number. The difference in formula is where you start your calculations on the income statement.
Understanding the EBITDA Formula
To begin your calculations, you need your income statement and your cash flow statement to get started on your EBITDA calculation. Statements should be from the period you would like to review or need it to be reviewed. A lot of companies may calculate the EBITDA monthly or quarterly. The section below explains the different components of the EBITDA Formula broken down for better understanding.
Your net income is the profit, also known as net profit. It is the last line on your income statement. This number is a reflection of your revenue minus the expenses. It includes the cost of goods sold, the operating and non-operating expenses, taxes, interest, and any other expenses not listed.
How a business is financing its activities is reflected by the interest. Depending on how a business raises its funds and what your interest payments are can differ significantly from company to company. This is why interest is not taken into account. Comparing businesses can become very difficult if taking interest into account.
The location of your business and/or company will dictate the taxes you pay. Regions have their own tax requirements, and, thus, companies can become difficult to compare if taxes are to be taken into account. They can vary widely from location to location, and taxes are also something businesses do not have control over.
Depreciation & Amortization (D&A):
This makes reference to the investment that loses value over time. Depreciation is tangible fixed assets, i.e, equipment, vehicles, and/or a building. Amortization means intangible assets like patents. In both instances, this refers to the deterioration of value of assets. It can be highly subjective when analyzing the depreciation and amortization expenses of the business. Because of the subjective-ness, they are also taken out of consideration when calculating the EBITDA.
It’s important to you as a business owner to know and understand your operating profitability and any and all other ways that your profitability can be analyzed. Knowing and interpreting the end results can assist you in making better accounting and operational decisions.
For more information speak to SRJ Chartered Professional Accountants. We also provide consultations, assistance with tax preparations or other financial expertise. We can be reached at 647-725-2537 or send an email to firstname.lastname@example.org with your inquiries.
Frequently Asked Questions
EBITDA calculation can be done using two different formulas—both with the same outcome, just a different method.
Formula 1 – EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Formula 2 – EBITDA = Operating Profit + Depreciation + Amortization.
The formula you end up employing to find the EBITDA for your business is based on personal preference.
The EBITDA is very often used by investors and business owners. Companies looking to sell look at the EBITDA calculation for a quick comparison with other companies within the same industry. The EBITDA calculation also helps with watching over the proficiency of the business. EBITDA, alongside other calculation metrics can give you a better idea of your business’s health.
Gross profit is the profit a company makes after subtracting the costs of products/services. EBITDA measures the profitability of a company and/or business.
This depends on the information you are looking for. Are you looking for the end result of an income statement that includes all expenses from the revenue (operating costs, costs of goods sold, taxes, interest, etc.), which is the net profit, or are you looking for the profitability of the company which would then be the EBITDA.