How to calculate EBITDA?
EBITDA is a company’s net income but excludes the impact of interest income or expense related to debt instruments, depreciation and amortization, and stated and federal income taxes. The whole point of calculating EBITDA is to better understand a company’s GAAP cash flow. The reason we exclude depreciation and amortization is because it is not an actual cash expense. Additionally, we exclude interest expense and income tax expense because that is based solely on the company’s capital structure.
To calculate EBITDA, start with the company’s reported net income, add back interest expense (net of interest income), add back state and federal income taxes, and add back depreciation and amortization expense.
So as you can see in the example below, our starting point would be net income. We would then add back depreciation and amortization, interest expense, and income taxes.
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