This awkward acronym simply stands for earnings before interest, taxes, depreciation, and amortization. EBITDA is one of the factors used to analyze a company's financial health.
- TIP: You can find the Enterprise Multiple, a ratio used to determine the value of a company, by dividing the Enterprise Value, or EV, with EBITDA.
- Step 1: Realize that EBITDA is a non-GAAP, or Generally Accepted Accounting Principles, formula that allows for more discretion as to what is, and what is not, included in the calculation. Companies frequently change items included in their EBITDA calculation from one reporting period to the next.
- FACT: EBITDA started being frequently used in the 1980s, as many leveraged buyouts were taking place, when it was used to measure the ability of a company to service its debt.
- Step 2: Arrive at EBITDA by adding net income to interest, taxes, depreciation, and amortization costs and subtract this number from the total expenses. Subtract the resulting total from revenue to find EBITDA, which is essentially revenues minus expenses.
- Step 3: Ascertain the cost of amortization. Amortization in a company is usually the depreciation of intangible assets.
- Step 4: Establish the amount of interest paid, which is the debt the company incurred to finance purchases.
- Step 5: Find the total amount of income taxes paid to local, county, state, and federal government.
- Step 6: Locate the cost of depreciation. Depreciation indicates assets that have lost value over time through aging or becoming obsolete.
- Step 7: Determine net income, which is total income minus total expenses. You can find net income on the company's income statement. If total income is $500 and total expenses are $450, then net income is $50.