If you’re wondering how EBITDA is calculated, you’re not alone. EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a popular financial metric that helps assess a company’s profitability before certain non-operating expenses.
Let’s break down the calculation methods clearly and simply.
? The EBITDA Formula
There are two commonly used formulas to calculate EBITDA:
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Method 1: From Net Profit
Method 2: From Operating Profit (EBIT)
? Tip: Choose the formula based on what financial figures are available to you. If you have Net Profit, use Method 1. If you have EBIT, go for Method 2.
? EBITDA Calculation Example
Let’s say a company has the following data:
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Net Profit: ₹12,00,000
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Interest Expense: ₹1,80,000
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Taxes Paid: ₹2,20,000
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Depreciation: ₹1,30,000
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Amortization: ₹70,000
Now, apply the formula:
✅ Therefore, the EBITDA is ₹18,00,000.
✅ Why Does EBITDA Matter?
EBITDA helps investors and business owners:
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Evaluate performance across companies regardless of tax or capital structure
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Understand operational efficiency
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Compare businesses in the same sector more effectively
Furthermore, EBITDA is often used in valuations and credit analysis because it focuses on core earnings.
⚠️ Things to Keep in Mind
While EBITDA is useful, it is not recognized under Indian GAAP or IFRS. Additionally:
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Non-cash expenses like depreciation and amortization must be added correctly
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The method of calculation should remain consistent for comparisons
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It’s important to use audited financial data for accuracy
Income tax return file – Here
? EBITDA vs EBIT – Quick Difference
EBITDA includes depreciation and amortization, whereas EBIT does not. As a result, EBITDA typically shows a higher number, giving a clearer picture of raw profitability.
? Conclusion
To summarize, knowing how EBITDA is calculated is crucial for financial decision-making. You can use either method depending on the data available. Just remember to stay consistent and transparent when comparing across periods or companies.