EBITDA, as explained above, is similar to EBIT but it takes into account deprecation and amortization. The purpose of EBITDA is to understand and compare the profit and earnings of companies from different locations and countries. This provides a more balanced outlook on the business success.
Very simple, the EBITDA can be calculated with the following formula:
EBITDA = operating profit + depreciation expense + amortization expense
All of these values are unit less. This means you can use any currency and the equation still works.
How to calculate EBITDA
We will now look at an example of how you might calculate the EBITDA of a given company.
First we need to determine the current operation profit of that business. This is done by taking the total revenue and subtracting the total costs, which include material, labor, ect. Say we wind this company has an operation profit of $1,000,000.00.
Next we need to determine the depreciation expense. We find that this company has a depreciation expense of $5,000.00.
Next, we need to determine the amortization expense. This is the expense due to interest. We find that the company has an amortization expense of $100,000.00.
Finally, we plug all of these values into the equation above:
EBITDA = $1,000,000.00 + $5,000.00 + $100,000.00 = $1,105,000.00
For more finance calculators click here.