Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a popular financial metric used by investors and analysts to evaluate a company’s profitability, operational efficiency and cash flow generation. Calculating EBITDA can be quite simple when you know where to look within a company’s financial statements. In this article, we will walk you through the steps of calculating EBITDA from an income statement.

Step 1: Locate Key Figures on the Income Statement

To calculate EBITDA, start by reviewing the company’s income statement. You’ll need to identify the following figures:

– Revenue or Sales: This is the total amount of money generated from selling goods or services during a certain period.

– Cost of Goods Sold (COGS): These are direct costs associated with producing goods or providing services.

– Operating Expenses: These are expenses related to business operations that do not involve production or service provision.

– Depreciation: This figure represents the reduction in value of physical assets over a given time period.

– Amortization: This is the gradual reduction in value of intangible assets over their useful life.

Step 2: Calculate Operating Income

Operating income, also referred to as operating profit or operating earnings, is calculated by subtracting COGS and operating expenses from revenue:

Operating Income = Revenue – COGS – Operating Expenses

Step 3: Add Depreciation and Amortization

To determine EBITDA, add depreciation and amortization back into the operating income calculated in Step 2:

EBITDA = Operating Income + Depreciation + Amortization

Example:

Let’s say you have an income statement with the following figures:

– Revenue: $1,000,000

– COGS: $500,000

– Operating Expenses: $300,000

– Depreciation: $50,000

– Amortization: $20,000

Calculating EBITDA:

1. Operating Income: $1,000,000 (Revenue) – $500,000 (COGS) – $300,000 (Operating Expenses) = $200,000

2. EBITDA: $200,000 (Operating Income) + $50,000 (Depreciation) + $20,000 (Amortization) = $270,000

Conclusion:

EBITDA is an essential financial metric that enables investors and analysts to assess a company’s operating performance without considering factors such as interest expenses, tax rates or the depreciation and amortization of assets. By following these steps and understanding which figures to use from an income statement, you can easily calculate EBITDA and gain valuable insights into a company’s financial health.