What this calculator does
EBITDA strips out four things from net income: interest, tax, depreciation and amortisation. What is left is meant to show how the operating business performs before financing structure and accounting choices get involved.
That is both its use and its weakness. Adding back $90,000 of depreciation lifts the margin from 19.0 per cent to 25.0 per cent, but the equipment still wears out and still has to be replaced. EBITDA is a useful comparison tool, not a measure of cash a business can spend.
The formula
Start from net income and add back interest expense, tax expense, depreciation and amortisation. The margin divides the result by revenue.
| Term | Meaning |
|---|---|
| EBITDA | Earnings before interest, tax, depreciation and amortisation. |
| EBITDA margin | EBITDA as a percentage of revenue, used to compare operating profitability. |
| Amortisation | The equivalent of depreciation for intangible assets such as software or goodwill. |
The inputs explained
| Field | What to enter |
|---|---|
| Net income ($) | Net income, the bottom line after everything. |
| Interest expense ($) | Interest expense, added back to remove financing structure. |
| Tax expense ($) | Tax expense, added back to remove jurisdiction effects. |
| Depreciation ($) | Depreciation on tangible assets. |
| Amortisation ($) | Amortisation of intangible assets. |
| Revenue ($) | Total revenue, used to calculate the margin. |
When to use it
Comparing companies with different debt
Removing interest lets two businesses be compared on operations rather than on how they are financed.
Valuing a business for sale
Small business sale prices are frequently quoted as a multiple of EBITDA.
Assessing a capital-intensive business
The gap between EBITDA and net income shows how much of profit is consumed by asset write-downs.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much does depreciation lift the margin?
The same business with three levels of depreciation.
Questions
Why is EBITDA criticised?
Because depreciation represents real assets being consumed, and a business that ignores it will eventually find its equipment needs replacing with money it has already counted as profit. Warren Buffett has been particularly pointed about this.
Is EBITDA the same as cash flow?
No, and treating it as such is a common mistake. It ignores working capital movements, capital expenditure, interest and tax, all of which are genuine cash outflows.
Why use it at all?
Because it isolates operating performance from decisions about financing, tax jurisdiction and depreciation policy. For comparing two businesses in the same industry, that isolation is genuinely useful.
What EBITDA margin is good?
It varies enormously by industry. Software businesses often exceed 30 per cent; distribution businesses may run in single digits. The figure only means something against sector comparables.
For a cash measure that accounts for capital spending, see the free cash flow calculator. For the valuation multiples EBITDA feeds, see the enterprise value calculator.