EBITDA Calculator

What EBITDA measures, and what it leaves out

EBITDA stands for earnings before interest, taxes, depreciation and amortization. You start with revenue, subtract the cost of the goods you sold and the cost of running the business, then add back the depreciation and amortization that were already taken out. What is left is a rough measure of how much the operation produces before financing and accounting choices enter the picture.

The number exists because two businesses that run the same way can report different profits. One buys its ovens outright and carries no debt. The other leases everything and pays 6% interest on a loan. Depreciation is heavier at the first, interest is heavier at the second, and net income ends up in different places. EBITDA removes both so the operating engine can be compared side by side.

Two limits follow from that design. Depreciation is added back even though the equipment still had to be bought, and interest is ignored even though the lender still gets paid every month. A business can post healthy EBITDA and still run short of cash. The company filings on SEC EDGAR show how public firms present the figure, nearly always next to the net income line rather than instead of it.

The one-line version: EBITDA = revenue - cost of goods sold - operating expenses + depreciation and amortization.

The two routes to the same number

The top-down route follows the income statement from the top. Take revenue, subtract cost of goods sold to get gross profit, subtract operating expenses such as rent, payroll and insurance to get operating income, then add back depreciation and amortization. Nothing below the operating line is touched, so interest and taxes never enter.

The bottom-up route starts at net income and reverses the four items named in the acronym. Add interest expense, add income tax, add depreciation, add amortization, and the total should equal the top-down answer. When the two do not match, a line was missed. Owner draws, a gain on the sale of a truck, or interest income parked in other income are the usual suspects.

Both routes land on $335,000. Divide that by revenue and you have the margin: 335,000 / 1,200,000 = 27.9%. The same division on operating income gives 20.8%, and on net income 12.9%, so the three numbers tell different stories about the same year.

Worked example: a bakery with $1.2 million in sales

Revenue for the year is $1,200,000. Flour, butter, packaging and the wholesale delivery contract come to $640,000, a 53.3% cost of goods sold. Rent for the storefront, wages for nine staff, utilities and insurance add up to $310,000. Gross profit is $560,000 and operating income is $250,000 before any financing line.

The ovens, proofers and delivery van were depreciated by $85,000 this year. Add that back and EBITDA is $335,000, a 27.9% margin. For every $100 that comes through the register, $27.92 is left before the bank, the tax office and the wear on the equipment are counted.

Now suppose the owner replaces one oven in January with a $120,000 unit depreciated over ten years. Depreciation rises by $12,000 to $97,000 and operating income falls to $238,000, while EBITDA stays at $335,000. That gap is what the measure is built to show: the operating result did not change, only the accounting for the equipment did, and the $120,000 of cash left the business either way.

Compare this with the same bakery carrying a $500,000 equipment loan at 6% interest, which costs $30,000 a year. Net income drops by that amount, EBITDA does not move at all, and a buyer comparing the two shops sees the same operating performance with a different balance sheet.

Worked example: building EBITDA up from net income

A small business owner rarely has a clean income statement. What they have is a Schedule C or a bookkeeping export, and the four add-backs can be read straight off it. Take net profit of $155,000, add the $40,000 of interest on the equipment loan, add $55,000 of income tax, then add the $85,000 depreciation deduction and $0 of amortization. The total is $335,000, the same as the top-down route.

On Schedule C (Form 1040) the depreciation figure sits on line 13 and interest on line 16b, so both are easy to find. Income tax is the one line that does not appear on the form at all, because the schedule stops at taxable business income. Use the tax from the owner's Form 1040 in its place, or leave it at zero and call the result pre-tax EBITDA.

One warning about this route. A sole proprietor's net profit already pays the owner, while a corporation's net income is struck after salaries. Comparing the two without noting that difference overstates the corporation, so adjust for owner compensation before the numbers go side by side.

Where EBITDA flatters a business

Capital spending is the biggest blind spot. A trucking company can report $400,000 of EBITDA and spend $500,000 replacing tractors, which means the operation consumed more cash than it produced. Depreciation is added back as if the equipment were free, and for an asset-heavy business it is not.

Working capital is the second. A wholesaler that doubles its inventory to win a large account shows more revenue and more EBITDA while writing a check for the stock. Neither the cash tied up in inventory nor receivables sitting at 60 days appear anywhere in the figure.

The third is the word adjusted. Sellers and lenders add back one-time costs, owner perks and legal settlements, then present adjusted EBITDA as the real number. Some add-backs are fair, such as a roof repair that will not repeat. Others are recurring costs with a new label, such as the owner's car and travel that a buyer would have to pay for. Ask for the list and check whether any item shows up in three years out of five.

A practical test: subtract capital spending, interest and taxes from EBITDA. A business with $335,000 of EBITDA, $120,000 of capex, $40,000 of interest and $55,000 of taxes keeps $120,000. If that remainder is thin or negative while the headline number looks strong, the operation has a cash problem the metric hides.

EBITDA margins by industry

Margins differ so much by sector that a single benchmark is useless. A grocery chain that keeps 6% is doing well, while a software company at 20% may be underperforming. The ranges below are rough guides drawn from public filings for mid-sized operators, not rules, and a single bad year can push any of them outside the band.

Size matters inside a sector too. A single location restaurant with $600,000 in sales often runs a lower margin than a ten unit group, because the group spreads marketing and management over more revenue. When you compare a small shop against a published sector average, check whether the average comes from operators with $50 million in sales.