What is EBITDA?
EBITDA measures the financial performance of a business by removing interest, taxes, depreciation, and amortization from earnings. This shows how the business performs based on its core operations.
EBITDA is a financial metric used to measure a company’s operating profit from all forms of business operations within a specific period and indicates the business’s ability to generate cash from operations.
For example, using a manufacturing operation generating $500,000 in sales and spending $220,000 in operating expenses, this results in $280,000, which is referred to as EBITDA (this number does not reflect depreciation expense of $50,000, loan interest expense of $20,000, nor tax expense of $30,000).
EBITDA allows for operating performance comparison between two businesses without regard to any differences in their financing structures or accounting methods.
How to calculate EBITDA using this calculator?
The calculator requires several inputs from your income statement. Each value represents a different part of your business revenue or expenses.
1. Revenue
The total money that the business gets from sales is called revenue. This is the money that the business receives during a period of time. You can find the revenue number in the income statement or in your accounting records.
2. Operating expenses
The costs that the business needs to pay every day to keep operations running are called operating expenses. These costs include salaries the business pays to its employees, rent for the building materials, money spent on marketing, and utility bills.
Operating expenses do not include things like interest payments or taxes that the business pays.
3. Depreciation and amortization
When the business buys things like machines, vehicles, or equipment, they lose value over time. This loss in value is called Depreciation.
The business also buys things that you cannot touch, like software licenses or patents, and these things also lose value over time. This loss in value is called Amortization.
Depreciation and amortization are important because they help the business understand how/what value it is losing over time.
4. Interest and taxes
Interest represents payments made on business debt. Taxes are payments owed to government authorities. Both values are typically listed separately on the income statement.
After entering these inputs, the calculator estimates EBITDA based on revenue and operating costs.
What does EBITDA represent?
EBITDA represents the amount of income generated by a company through its normal operations without considering interest, taxes, depreciation, and amortization.
EBITDA is also presented as a % of total revenue. It is referred to as EBITDA margin. It is calculated by: (EBITDA/ Revenue) x 100 = EBITDA Margin.
To illustrate, in case Company X has a total revenue of 500,000 and EBITDA of 280,000, then the calculation is (280,000/500,000) x 100 = 56%. EBITDA margins in industries are different.
The EBITDA margins of manufacturers tend to be high compared to other businesses, and retail businesses tend to have lower margins. A low EBITDA margin indicates that the company has had to spend more in its operations than it earns.
The greater the EBITDA margin, the more the business can meet its operating expenses and invest in expansion. EBITDA margins are used by investors and lenders to compare the efficiency of various companies.