EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and you calculate it using numbers pulled directly from a company’s financial statements. There are two straightforward formulas, both producing the same result. Whether you’re sizing up your own business for a potential sale, applying for financing, or evaluating a company as an investor, here’s exactly how to get the number.
The Two EBITDA Formulas
You can calculate EBITDA starting from either net income or operating income. The net income method adds back everything the metric is designed to strip out:
EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortization
The operating income method is shorter because operating income already excludes interest and taxes:
EBITDA = Operating Income + Depreciation + Amortization
Both formulas should give you the same number. If they don’t, it usually means there are non-operating items (like gains or losses from selling assets) sitting between operating income and net income that you need to account for. The net income method forces you to identify each component, which makes it easier to spot those discrepancies.
Where to Find Each Number
Every input comes from standard financial statements. If you’re looking at a public company, these are in quarterly and annual SEC filings. If you’re working with your own business, your bookkeeping software or accountant-prepared financials will have them.
- Net income: The bottom line of the income statement (also called the profit and loss statement).
- Interest expense: Listed on the income statement, typically as its own line item below operating income.
- Income taxes: Also on the income statement, usually labeled “provision for income taxes” or simply “income tax expense.”
- Depreciation and amortization: These can be trickier to find. They sometimes appear as a separate line on the income statement, but they’re often buried. The most reliable place to look is the cash flow statement, under the “operating activities” section, where depreciation and amortization are listed as add-backs to net income. You can also find them in the notes accompanying the income statement.
Depreciation is the gradual expense write-down of physical assets like equipment, vehicles, and buildings. Amortization is the same concept applied to intangible assets like patents or software licenses. Neither involves actual cash leaving the business in the current period, which is precisely why EBITDA adds them back.
A Quick Example
Say your business reported the following last year: net income of $200,000, income taxes of $60,000, interest expense of $25,000, and depreciation and amortization totaling $40,000.
Using the net income formula: $200,000 + $60,000 + $25,000 + $40,000 = $325,000 EBITDA.
If you used operating income instead, you’d start with $285,000 (which is net income plus taxes plus interest) and add the $40,000 in depreciation and amortization. Same $325,000.
When You Need Adjusted EBITDA
Standard EBITDA uses the numbers as they appear on financial statements. Adjusted EBITDA goes a step further by removing expenses that don’t reflect the business’s normal, ongoing operations. This version matters most during business valuations, acquisitions, and loan applications, because buyers and lenders want to understand what the business earns under typical conditions.
Common adjustments include:
- Owner compensation above market rate: If you’re a small business owner paying yourself $300,000 when a replacement manager would cost $150,000, a buyer would add back that $150,000 difference. The IRS defines reasonable compensation as the amount that would ordinarily be paid for similar services by similar organizations in similar circumstances.
- Personal expenses run through the business: In smaller firms, owners often pay for personal vehicles, meals, or travel through business accounts. These get added back.
- One-time costs: Lawsuit settlements, startup expenses for a new location, insurance claims, or major one-off repairs that aren’t expected to recur.
- Non-cash expenses beyond depreciation: Stock-based compensation, write-downs of assets, or impairment charges.
- Above or below-market rent: If the business operates in a building the owner also owns, and the rent charged is well above or below fair market value, the difference gets normalized.
The goal is to show a prospective buyer or lender what the business would earn for a new owner running it at arm’s length. If you’re preparing financials for a sale, expect a buyer’s due diligence team to scrutinize every add-back you propose.
What EBITDA Tells You (and What It Doesn’t)
EBITDA is useful because it strips away financing decisions (interest), tax situations (which vary by entity type and jurisdiction), and accounting methods for asset depreciation. That makes it easier to compare the core operating profitability of two businesses even if one carries heavy debt and the other is debt-free, or one recently bought expensive equipment and the other leases everything.
But EBITDA has real blind spots. It ignores capital expenditures, meaning a business that needs to spend $500,000 a year replacing equipment looks just as profitable as one with minimal reinvestment needs. It also ignores changes in working capital. A company with $1 million in EBITDA but growing accounts receivable and inventory could actually be burning cash. Operating cash flow, which you’ll find on the cash flow statement, captures these realities and gives a clearer picture of the actual money available to the business.
EBITDA also isn’t an official accounting metric under GAAP (generally accepted accounting principles). Public companies that report it are required to reconcile it back to net income so investors can see exactly what was added back. For private businesses, there’s no such requirement, which means two owners could calculate it differently. Always ask what’s included when someone hands you an EBITDA figure.
How Businesses Typically Use EBITDA
Business valuations are the most common reason people search for this number. Many industries price businesses as a multiple of EBITDA. A company with $500,000 in adjusted EBITDA in an industry where businesses sell for 4x to 6x EBITDA might be valued at $2 million to $3 million. The specific multiple depends on the industry, growth rate, customer concentration, and dozens of other factors, but EBITDA is the starting point.
Lenders also rely on EBITDA to assess whether a business can handle debt payments. A common metric is the debt-to-EBITDA ratio: a company with $2 million in debt and $1 million in EBITDA has a ratio of 2x, which most lenders consider manageable. Loan covenants often require borrowers to stay below a certain threshold.
If you’re calculating EBITDA for your own business, pull the last three years of financials and calculate it for each year. A consistent or growing EBITDA tells a much stronger story to buyers and lenders than a single snapshot. And if you plan to make adjusted EBITDA claims, document every add-back with receipts, contracts, or clear explanations, because anyone on the other side of the table will want proof.