Search the wiki
»

# EBITDA Formula

Modified on 2011/07/08 09:56 by swathen Categorized as Uncategorized
EBITDA Definition
EBITDA Valuation

# EBITDA Formula¶

In order to completely understand the concept of EBITDA, an intelligent idea is to visualize the formula concept. The EBITDA calculation formula can be expressed as follows:

EBITDA = Revenues – Costs (excluding interest expenses, taxes, depreciation, and amortization)

or, if a person wants to view EBITDA in terms of the excluded expenses listed above, another way to calculate EBITDA is: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

## EBITDA Ratio Analysis¶

EBITDA is often used in accounting ratios that are used to compare the profitability of different companies in the same industry. It is important to have a preferable EBITDA so that you can make positive estimates about your company for the future. At the same time, it is just as important, if not more so, to have a positive EBITDA for outside observers. One example of a ratio being used to compare profitability is the EBITDA margin ratio, which is calculated as: EBITDA Margin Ratio = EBITDA/Sales

The idea is that excluding interest, taxes, depreciation, and amortization gives a clearer picture of a company’s operating performance. More specifically, the calculation of EBITDA allows the company to be viewed with no strings attached; essentially the skeleton and necessary structure functions and costs of the company. EBITDA is also used to measure the ability of a company to service its interest bearing debt, through the use of the EBITDA coverage ratio, which is calculated as: EBITDA Coverage Ratio = EBITDA/Debt Service

## EBITDA Valuation¶

Companies are often valued using a EBITDA valuation multiple. The enterprise value of a company is calculated using a multiple of its annualized EBITDA. This is usually expressed as: Enterprise Value (EV) = Multiple * EBITDA

where the multiple is derived from an average of comparable transactions in the company’s industry. To use this method to value a company’s equity, the company’s total debt less cash (known as net debt) is subtracted from its enterprise value: Equity Value = Enterprise Value - Total Debt - Cash