How to Calculate EBITDA: Formula, Example, and EBITDA Margin

What EBITDA means#

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is intended to show earnings before four categories that can differ because of financing choices, tax circumstances, and the accounting allocation of long-lived asset costs.

The U.S. Securities and Exchange Commission treats EBITDA as a non-GAAP financial measure, not as a standardized line item required by generally accepted accounting principles. That distinction matters: two companies can use the same label while presenting different adjustments, especially when they report adjusted EBITDA.

EBITDA can help answer questions such as:

How profitable are the company’s operations before financing and certain non-cash charges?
Is the EBITDA margin improving or deteriorating over time?
How do businesses with different debt levels or asset ages compare at a high level?
What earnings figure is being used in an enterprise-value multiple or debt covenant?

It cannot show how much cash the business generated, what its capital assets cost to maintain, or whether its debt burden is sustainable by itself.

EBITDA formulas#

There are two common starting points.

Formula using net income#

EBITDA = Net income
       + Interest expense
       + Income tax expense
       + Depreciation
       + Amortization

This approach begins at the bottom of the income statement and adds back the named items.

Formula using operating income or EBIT#

EBITDA = Operating income (EBIT)
       + Depreciation
       + Amortization

Interest and income taxes are already below operating income in a conventional income statement, so adding them again would double count them.

Before using either formula, confirm what each line contains. Some income statements combine depreciation with cost of goods sold or operating expenses rather than showing it separately. Amortization may appear in a note to the financial statements, the cash-flow statement, or a property and intangible-assets note.

Worked EBITDA calculation example#

Assume a company reports the following annual results:

Income-statement item	Amount
Revenue	$1,200,000
Cost of goods sold	$650,000
Operating expenses excluding D&A	$260,000
Depreciation and amortization	$90,000
Operating income	$200,000
Interest expense	$35,000
Income tax expense	$41,250
Net income	$123,750

Method 1: Start with net income#

EBITDA = $123,750 + $35,000 + $41,250 + $90,000
       = $290,000

Method 2: Start with operating income#

EBITDA = $200,000 + $90,000
       = $290,000

Both methods reach the same answer because the example uses consistent accounting inputs.

You can also verify the result from the operating-cost structure:

Revenue                                      $1,200,000
− Cost of goods sold                          $650,000
− Operating expenses excluding D&A            $260,000
                                                --------
EBITDA                                         $290,000

The calculation does not make the $90,000 asset cost disappear. It temporarily excludes the period’s depreciation and amortization charges from this particular performance measure.

How to calculate EBITDA margin#

EBITDA margin expresses EBITDA as a percentage of revenue:

EBITDA margin = EBITDA ÷ Revenue × 100

Using the example above:

EBITDA margin = $290,000 ÷ $1,200,000 × 100
              = 24.17%

This means the company generated about 24 cents of EBITDA for each dollar of reported revenue before interest, taxes, depreciation, and amortization.

Margin is generally more useful than the raw dollar amount when comparing periods of different size. If revenue rises from $1.2 million to $1.5 million while EBITDA remains $290,000, EBITDA has not fallen—but the margin declines from 24.17% to 19.33%. The company is producing less EBITDA per dollar of revenue.

Use the same definition in every period. A trend built from reported EBITDA in one year and aggressively adjusted EBITDA in the next is not a valid comparison.

Where to find each EBITDA input#

Net income#

Net income is normally near the bottom of the income statement. Use the figure that corresponds to the same business, ownership scope, and period as the other inputs. Do not mix consolidated net income with depreciation from only one subsidiary.

Interest#

Use interest expense included in arriving at net income. Some companies report interest income and interest expense separately, while others show a net amount. Decide whether the calculation is adding back gross interest expense or net interest, document the choice, and keep it consistent.

Income taxes#

Use the income-tax expense or benefit associated with the period—not simply cash taxes paid. A tax benefit is negative, so it reduces rather than increases the add-back when applying the formula literally.

Depreciation#

Depreciation allocates the cost of qualifying tangible assets across their useful lives. The IRS notes that depreciable property can include machinery, equipment, buildings, vehicles, and furniture, although tax depreciation and book depreciation can differ. For EBITDA calculated from financial statements, use the relevant book amount unless the analysis specifically calls for a tax measure.

Amortization#

Amortization performs a similar allocation for qualifying intangible costs. Depending on the company, it may relate to acquired customer relationships, software, patents, trademarks, or other intangible assets.

When depreciation and amortization are combined as “D&A,” add the combined amount once. Do not also add the components separately.

EBITDA versus adjusted EBITDA#

Plain EBITDA removes the four items named in the acronym. Adjusted EBITDA makes additional exclusions selected by the company or analyst.

Common proposed adjustments include:

Restructuring or severance charges
Acquisition and integration costs
Litigation expenses or settlements
Stock-based compensation
Asset impairments
Gains or losses on asset sales
Unusual disaster or shutdown costs
Owner compensation adjustments in private-company analysis

An adjustment is not automatically appropriate because management calls an expense “one-time.” If similar restructuring, acquisition, or legal costs recur every year, excluding them can make ordinary operating costs look exceptional.

For U.S. public-company disclosure, SEC guidance requires non-GAAP measures to be reconciled to the most directly comparable GAAP measure and warns against misleading exclusions or undue prominence. For your own comparison, recreate that discipline:

Start with the reported GAAP figure.
List every adjustment separately.
Explain why each adjustment is useful.
Check whether the same type of cost appeared in earlier periods.
Compare both the unadjusted and adjusted results.

Never substitute another custom earnings measure into the formula and label the answer simply “EBITDA.” The SEC’s compliance guidance uses net income as the intended GAAP starting point for the “earnings” in EBIT and EBITDA.

What EBITDA can and cannot tell you#

EBITDA can help with operating comparisons#

Removing interest can make high-level comparisons less dependent on how each business is financed. Excluding income taxes can reduce differences created by tax jurisdictions, tax attributes, and ownership structures. Excluding D&A can help isolate current-period earnings before those accounting allocations.

This is why EBITDA and EBITDA margin often appear in operating reviews, lending discussions, acquisition analysis, and valuation multiples such as enterprise value divided by EBITDA.

EBITDA is not cash flow#

EBITDA does not deduct changes in inventory, receivables, payables, and other working-capital accounts. It also ignores cash capital expenditures, debt principal payments, and cash taxes.

A company can report positive EBITDA while consuming cash because customers have not paid, inventory has increased, equipment must be replaced, or lenders require substantial repayments. Use the cash-flow statement to evaluate cash generation.

EBITDA does not remove the economic cost of assets#

Depreciation and amortization are non-cash charges in the current period, but the assets often required cash investment earlier and may require replacement later. Excluding D&A is especially consequential for capital-intensive businesses such as manufacturing, transportation, telecommunications, and infrastructure.

EBITDA does not measure debt safety#

Interest is excluded by definition, even though lenders still must be paid. Pair EBITDA with debt, interest coverage, maturity schedules, available cash, and free cash flow before judging solvency.

EBITDA compared with other profit measures#

Measure	Simplified meaning	Major items still deducted
Gross profit	Revenue minus direct cost of sales	Operating expenses, D&A, interest and tax
Operating income / EBIT	Profit from operations after D&A	Interest and tax
EBITDA	Earnings before interest, tax and D&A	Operating cash costs, but not the four named items
Net income	Bottom-line accounting profit	Interest, tax, D&A and other recognized items
Operating cash flow	Cash generated by operating activity	Reflects working-capital movements; presentation differs from EBITDA
Free cash flow	Cash remaining after a defined capital-spending deduction	Definition varies and must be checked

No single measure is “the real profit” in every decision. The appropriate measure depends on whether you are studying operating performance, accounting profitability, cash generation, debt capacity, or valuation.

Common EBITDA calculation mistakes#

Adding back interest and tax to operating income#

Operating income normally excludes both already. Starting with operating income and adding interest and tax produces an overstated answer.

Using cash taxes instead of tax expense#

Cash paid during the year can relate to a different reporting period. Standard EBITDA calculated from net income uses the tax amount included in arriving at that net income.

Mixing periods#

Do not combine trailing-12-month net income with annual depreciation or one quarter of interest expense. Every input must cover the same period.

Double counting D&A#

If depreciation and amortization are already supplied as one combined figure, add it once.

Ignoring negative amounts#

Interest income, tax benefits, gains, and losses require attention to signs. A calculator cannot determine the accounting meaning of an incorrectly entered positive or negative number.

Comparing incompatible adjusted figures#

Company A may exclude stock compensation while Company B does not. Compare the reconciliation, not just the headline label.

Treating EBITDA as business value#

EBITDA is an earnings measure, not a valuation. An EBITDA multiple, growth outlook, debt, cash, working capital, customer concentration, and business risk may all affect value.

Frequently asked questions#

Is EBITDA the same as operating profit?#

Not usually. Operating profit or EBIT is generally after depreciation and amortization, while EBITDA adds those expenses back. They can be equal when a business has no D&A for the period.

Can EBITDA be negative?#

Yes. Negative EBITDA means the business did not cover its relevant operating expenses before interest, tax, depreciation, and amortization under the chosen definition. Adding back D&A can make EBITDA less negative than operating income, but it does not guarantee a positive result.

What is a good EBITDA margin?#

There is no universal good percentage. Asset intensity, recurring revenue, competition, growth stage, accounting classification, and industry economics differ. Compare the company with genuinely similar businesses and with its own consistently calculated history.

Does EBITDA include owner salary?#

Standard EBITDA includes compensation expense recorded in operating costs. A private-company valuation may present an adjusted figure for above- or below-market owner compensation, but that adjustment must be shown separately and supported rather than hidden inside EBITDA.

Does EBITDA include rent?#

Ordinary rent expense generally remains in EBITDA. Lease-accounting presentation and company-defined adjustments can complicate comparisons, so check the financial-statement reconciliation.

Is EBITDA before revenue or after revenue?#

Revenue is the starting inflow used to derive earnings. EBITDA is calculated after subtracting the applicable operating costs from revenue, but before the four named categories.

Why do lenders use EBITDA?#

It can provide a consistent starting point for leverage and coverage calculations, but loan agreements often define their own adjusted EBITDA in detail. Use the agreement’s definition for covenant testing rather than a generic online formula.

Sources and methodology#

The worked example uses internally consistent hypothetical financial statements. It is provided to explain the arithmetic, not to supply accounting, tax, lending, investment, or valuation advice. Confirm classifications against the applicable statements and agreements. Sources and assumptions were reviewed on August 30, 2026.