Glossary
EBITDA
EBITDA shows up in earnings releases and on stock pages. It adds four costs back to profit, which makes it look bigger than net income and easy to misread.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It starts from net income and adds those four costs back, so it is always larger than net income when they are positive.
Quick answer
EBITDA means earnings before interest, taxes, depreciation and amortization [1]. Start from net income, then add back income tax, interest expense, depreciation and amortization [1]. It is not a GAAP measure, and the SEC staff says it should be reconciled to net income [1].
Key points
On this page
How do you calculate EBITDA?#
The SEC staff uses the definitions from Exchange Act Release No. 47226: EBIT is earnings before interest and taxes, and EBITDA is earnings before interest, taxes, depreciation and amortization [1]. "Earnings" means net income as presented in the GAAP statement of operations [1]. So you build EBITDA from the bottom of the income statement upward.
EBITDA = net income + income tax expense + interest expense + depreciation + amortization
The table below uses the hypothetical company from the SEC's income statement guide [2]. That guide does not split out depreciation, so we assume $40,000 of its $210,000 operating expenses were depreciation and amortization. That one line is our assumption, not the SEC's.
| Step | Amount |
|---|---|
| Net income | $291,000 |
| Add back income tax expense | $77,000 |
| Add back interest expense | $7,000 |
| Equals EBIT | $375,000 |
| Add back depreciation and amortization (assumed) | $40,000 |
| Equals EBITDA | $415,000 |
Net income, tax and interest from the SEC's hypothetical income statement [2]. Depreciation and amortization assumed. EBIT and EBITDA calculated.
In this simple example, EBIT lands exactly on the SEC's operating profit line of $375,000 [2]. Real income statements can carry more lines between the two, such as discontinued operations [3], so check the company's own reconciliation.
What does EBITDA leave out?#
Four costs, each of them real. Interest expense is money owed or paid to lenders, and income tax expense is the estimated tax owed to the government [2]. Depreciation recognizes the loss in value of a tangible asset over its estimated useful life, and amortization does the same for an intangible asset [2].
Nothing in the EBITDA formula subtracts the cash a company spends on new equipment. Free cash flow does: it is typically operating cash flow minus capital expenditures [1]. Read the two side by side.
What is Adjusted EBITDA?#
It is any EBITDA-style figure calculated differently from the standard definition. The SEC staff says such measures should not be called EBIT or EBITDA, and their titles should be distinguished, such as "Adjusted EBITDA" [1]. The reporting company picks the adjustments, so check its reconciliation before you compare two companies' Adjusted EBITDA.
There are guardrails. When a company publishes a non-GAAP measure, Regulation G requires the most directly comparable GAAP measure and a reconciliation [4], and the measure must not be misleading [4]. If EBITDA is presented as a performance measure, the reconciliation should go back to net income [1]. In SEC filings the GAAP figure must be shown with equal or greater prominence [5]. Start with that reconciliation table, then look at earnings per share, which is built on net income.
Frequently asked questions#
Is EBITDA the same as operating income?
Not always. In the SEC's simple example, adding interest and tax back to net income gives exactly the operating profit line, $375,000 [2]. EBITDA then adds depreciation and amortization on top, so it is larger than operating income whenever those costs exist.
Is a high EBITDA good?
On its own it tells you little. It excludes interest, taxes, depreciation and amortization [1], so a company can show a large EBITDA and still report a small profit or a net loss. Compare it with net income and free cash flow before drawing any conclusion.
Is EBITDA in the audited financial statements?
No. It is a non-GAAP measure. Companies that present it publicly must also show the comparable GAAP figure and a reconciliation [4].
The bottom line#
EBITDA is net income with interest, taxes, depreciation and amortization added back, so it is larger than net income whenever those costs exist. Read it next to net income and free cash flow, check the company's reconciliation, and treat "Adjusted EBITDA" as a figure defined by the company that reports it.
Sources
Education only. This page is not investment, tax or legal advice. Stocks can lose value. See our risk disclosure.
