{"id":20186,"date":"2023-02-14T16:28:04","date_gmt":"2023-02-14T16:28:04","guid":{"rendered":"https:\/\/swoopfunding.com\/us\/uk\/blog\/how-to-calculate-ebitda\/"},"modified":"2024-03-13T11:50:43","modified_gmt":"2024-03-13T11:50:43","slug":"how-to-calculate-ebitda-2","status":"publish","type":"blog","link":"https:\/\/swoopfunding.com\/us\/blog\/how-to-calculate-ebitda\/","title":{"rendered":"How to calculate EBITDA"},"content":{"rendered":"\n

There are several different metrics businesses can use to calculate their financial health and performance, and EBITDA is one of them. EBITDA is often used by businesses to compare their financial performance against that of their competitors, while analysts might use it to help determine the sustainability of an organisation. <\/p>\n\n\n\n

Additionally, if you are looking for a business loan, many banks will use EBITDA to assess whether a company can repay its debts. <\/p>\n\n\n\n

This guide takes a closer look at how to calculate EBITDA and its pros and cons. <\/p>\n\n\n\n

What is EBITDA?<\/h2>\n\n\n\n

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a type of earnings metric that can help understand a business\u2019s ability to generate cash flow<\/a> for its owners. It also helps financial advisers and analysts calculate how much a business is earning before any reductions and modifications take place. <\/p>\n\n\n\n

EBITDA doesn\u2019t account for the different ways a company might use debt, equity, cash or other sources of capital to finance its operations. It also excludes non-cash expenses such as depreciation, and it excludes taxes. As such, EBITDA can be a useful way to evaluate a business and is often used to compare two similar businesses or determine a company\u2019s cash flow potential.<\/p>\n\n\n\n

EBITDA became a popular method of measuring a company\u2019s performance in the 1980s. Investors and lenders involved in leveraged buyouts found it a useful way to estimate whether the targeted company had the profitability to pay off the debt likely to be incurred in the acquisition. Because a buyout would usually result in changes to the capital structure and tax liabilities, it made sense to exclude the interest and tax expenses from earnings. <\/p>\n\n\n\n

Calculating EBITDA<\/h2>\n\n\n\n

There are two ways to calculate EBITDA. One is based on net income and the other on operating income. We\u2019ve outlined both methods below:<\/p>\n\n\n\n

EBITDA Formula<\/h3>\n\n\n\n

The first EBITDA formula is as follows:<\/p>\n\n\n\n

Net income + taxes + interest expenses + depreciation + amortization = EBITDA<\/p>\n\n\n\n

The second EBITDA formula is:<\/p>\n\n\n\n

Operating income + depreciation and amortization = EBITDA<\/p>\n\n\n\n

To use EBITDA, it\u2019s important to understand what each part of the formula means.<\/p>\n\n\n\n

Earnings<\/h4>\n\n\n\n

Your earnings are usually your net profit as you report it to the IRS. Your net profit is the total revenue generated from sales, minus the total amount you deduct as a legitimate business cost.<\/p>\n\n\n\n

Interest<\/h4>\n\n\n\n

Interest expenses are the cost of having debt. For EBITDA, the interest you are charged when you repay your debt is added back to your earnings. <\/p>\n\n\n\n

Taxes<\/h4>\n\n\n\n

A company\u2019s taxes can vary from one period to the next and are affected by a number of conditions that might not directly relate to your company\u2019s operating results. <\/p>\n\n\n\n

Depreciation & Amortization<\/h4>\n\n\n\n

Depreciation and amortization represent the gradual decrease in value of assets over time. Depreciation applies to tangible assets such as machinery or vehicles, and EBITDA adds back this loss in value. Amortization applies to intangible, or non-physical, assets such as patents or copyrights which eventually expire, and this is also added back.<\/p>\n\n\n\n

Try our handy EBITDA calculator<\/a> today!<\/p>\n\n\n\n

Why use EBITDA?<\/h2>\n\n\n\n

EBITDA is considered to more accurately reflect the performance of a business and it can give an analyst a quick estimate of the company\u2019s value. What\u2019s more, if a business is not making a net profit, EBITDA can be used by investors to evaluate the business. It can be ideal for comparing similar companies in the same industry and business owners often use it to compare their performance against competitors. <\/p>\n\n\n\n

Disadvantages<\/h3>\n\n\n\n

One of the biggest disadvantages of EBITDA is that it\u2019s possible for companies to include or exclude different components which can make it a misleading measurement for traders and analysts. Companies can decide to present financial decisions in a more favourable light, by excluding debts for example, and this can make a company seem more profitable than it actually is.<\/p>\n\n\n\n

EBITDA also does not account for certain expirable assets or assets that depreciate in value over time. <\/p>\n\n\n\n

For these reasons, EBITDA should not be used exclusively as a measure of a company\u2019s financial performance. A high EBITDA can make a company look like a good investment, but only using this metric could result in an investor putting money in a company with high debt to repay or an organisation that needs to spend a lot of money replacing old equipment. <\/p>\n\n\n\n

Advantages<\/h3>\n\n\n\n

Although there are a number of drawbacks, EBITDA is often used because it only accounts for necessary expenses for the day-to-day running of a business and it represents the cash flow generated by ongoing operations. It is also a good indicator for how well a business is able to produce profits and an easy way to compare how well it\u2019s performing against its competitors. <\/p>\n\n\n\n

What is the debt to EBITDA ratio?<\/h2>\n\n\n\n

The debt to EBITDA ratio measures a company\u2019s ability to repay its debt. A high ratio can suggest that the company\u2019s debt is too much of a financial burden. <\/p>\n\n\n\n

If you\u2019re taking out a business loan<\/a>, the bank might include a debt-to-EBITDA ratio in your loan agreement. If it does, you will need to stick to this ratio or risk having to repay the loan in full immediately. <\/p>\n\n\n\n

Example EBITDA calculation<\/h2>\n\n\n\n

Below is an example EBITDA calculation for Company ABC:<\/p>\n\n\n\n