What is EBITDA? Formula, Calculation, and Example

EBITDA is a key financial metric used to assess operating performance before interest, taxes, depreciation, and amortisation. The abbreviation comes from English: earnings before interest, taxes, depreciation and amortisation.

This figure can make it easier to compare the operational earnings of businesses with different financing structures, tax positions, or amounts of depreciable assets. However, EBITDA is not a measure of cash flow, and it should never be used in isolation when evaluating a company's financial health.

Formula for EBITDA

EBITDA can be calculated based on operating profit:

EBITDA = operating profit + depreciation + amortisation

It can also be calculated from profit before tax, but then financial income, financial costs, tax, and other relevant items must be handled correctly. Accounting statements vary, so use the same definition when comparing companies.

Example of Calculation

Assume a company has the following figures:

EBITDA then becomes 4,000,000 + 1,500,000 = 5,500,000 Norwegian kroner.

This shows the profit before the cost of using and reducing the value of long-term assets is included. This does not mean that these costs are unimportant. A business with machinery, vehicles, or technical equipment may have significant ongoing investment needs even if its EBITDA looks strong.

What is EBITDA Margin?

EBITDA margin shows EBITDA as a percentage of operating income:

EBITDA Margin = EBITDA / operating income × 100

In the example, the margin becomes 5,500,000 / 20,000,000 × 100 = 27.5 percent.

The margin can be useful when comparing companies of different sizes. It's best to compare companies in the same industry and over several years. A normal margin for a software company might be unrealistic for a grocery store or contractor.

The Difference Between EBITDA and EBIT

EBIT is often equivalent to operating profit before interest and taxes. EBITDA also adds back depreciation and amortisation. Thus, EBITDA will normally be higher than EBIT when a company has such costs.

What Can EBITDA Be Used For?

EBITDA is often used to:

• monitor the development of operational activities
• compare companies with different financing structures
• calculate EBITDA margin
• analyse debt in relation to earnings
• make an initial assessment of valuation multiples

For example, in acquisitions, enterprise value divided by EBITDA is often used. Such a multiple must be adjusted for industry, growth, risk, debt, one-off items, and accounting principles.

Limitations You Need to Be Aware Of

EBITDA ignores several real economic burdens. The key figure does not show:

• investments needed to maintain operations
• changes in inventory, accounts receivable, and accounts payable
• interest and debt burden
• tax
• whether customers have actually paid
• the quality of earnings

A company can therefore have positive EBITDA and still experience payment problems. Also consider cash flow, liquidity, debt, equity, and investments.

How Proffi Should Display EBITDA

On a company profile, EBITDA should always be displayed with:

• financial year and currency
• the formula used
• the source items from the annual accounts
• development over at least three to five years
• EBITDA margin
• comparison with the relevant industry
• clear labelling if the figure has been calculated by Proffi

The user should be able to open the calculation and verify the figures. This builds more trust than a key figure without explanation.

Key figures are analytical tools and not a credit rating or investment recommendation.