EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It is a measure to gauge the profitability of a corporation or business. A person need not have an MBA to understand financial calculations. EBITDA is not as complicated to calculate as the lengthy acronym would suggest.
- Skill level:
Calculate net income. To do this get total income and subtract total expenses. Total income is defined as the amount of money obtained for services, labour or the sale of goods. Total expenses is defined as when a corporation uses up an asset or incurs a liability.
Determine income taxes. Income taxes are the total amount of taxes paid to federal, state and local governments.
Compute interest charges. Interest is the fee paid to companies or individuals that reimburses the individual or companies for the use of credit or currency.
Establish the cost of depreciation. Depreciation is the term used to define a tangible (machines or property) or intengible asset (a copyright, a trademark or brand name recognition) that loses value over time whether through aging, wear and tear or the assets becoming obsolete. There are two methods of depreciation: straight line and accelerated.
Ascertain the cost of amortisation. Amortisation is a method of decreasing the amounts of financial instruments over time including interest other finance charges.
Add all previously defined components. EBITDA (earnings before interest, taxes, depreciation and amortisation) equals amortisation plus depreciation plus interest plus net income plus income taxes. The resulting figure is then subtracted from total expense. This final figure is then subtracted from total revenue to arrive at EBITDA.
Tips and warnings
- EBITDA is a financial calculation that is NOT regulated by GAAP (Generally Accepted Accounting Principles) and therefore can be manipulated to a company's own ends.
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