How to Calculate EBITDA: Two Formulas & Examples
How to calculate EBITDA two ways, from net income up and from EBIT plus D&A, why bankers use it, its limitations, adjusted EBITDA, and EBITDA vs cash flow.
Jun 5, 2026 · 8 min read
To calculate EBITDA you start from one of two points on the income statement and add back the items the metric strips out. The first method starts at net income and adds back interest, taxes, depreciation, and amortization. The second starts at operating income (EBIT) and adds back only depreciation and amortization, since EBIT already excludes interest and taxes. Both give the same answer. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and it approximates a company's operating profitability before financing and accounting choices distort the picture. Bankers lean on it because it lets you compare businesses with different debt loads, tax rates, and asset bases on a level footing, which is why almost every valuation multiple uses it.
TL;DR
- EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization (bottom-up), per CFI.
- EBITDA = EBIT + Depreciation + Amortization (top-down); both methods reconcile to the same number.
- In CFI's example, 45 million dollars of EBIT plus 5 million of D&A gives EBITDA of 50 million, a 50 percent margin.
- EBITDA is capital-structure-neutral and tax-independent, so it standardizes comparisons across companies.
- Its main flaw, flagged by Warren Buffett, is ignoring capital expenditures, a real recurring cash cost.
What is EBITDA?
EBITDA is a measure of a company's core operating profitability that excludes the effects of financing, taxes, and non-cash accounting charges. Per Corporate Finance Institute, it evaluates a company's profitability from operations by removing interest, tax, depreciation, and amortization. Wall Street Prep describes it as a company's normalized operating cash flow generated by its core business. The four letters name exactly what gets added back: interest reflects financing decisions, taxes reflect jurisdiction, and depreciation and amortization are non-cash charges that spread the cost of assets over time. Strip all four out and you get a number meant to reflect operating performance alone, independent of how the company is funded or where it is taxed.
What are the two EBITDA formulas?
There are two standard ways to calculate EBITDA, and they reconcile to the same figure. The bottom-up approach starts at the bottom of the income statement; the top-down approach starts at operating income. Per CFI and Wall Street Prep, the formulas are:
The bottom-up version works back up from net income by undoing interest and taxes to reach EBIT, then adds back D&A. The top-down version starts at EBIT, which already excludes interest and taxes, so you only add back D&A. A practical tip from Wall Street Prep: pull the D&A figure from the cash flow statement rather than the income statement, since D&A is often buried inside cost of goods sold and operating expenses and is reported cleanly on the cash flow statement.
How do you calculate EBITDA with a worked example?
Walk through CFI's hypothetical company to see both methods land on the same answer. The company has revenue of 100 million dollars, cost of goods sold of 25 million, SG&A of 20 million, and R&D of 10 million, leaving operating income (EBIT) of 45 million. It carries 5 million of interest expense and a 20 percent tax rate, giving pre-tax income of 40 million, taxes of 8 million, and net income of 32 million. D&A is 5 million.
| Line item | Amount (dollars, millions) |
|---|---|
| Revenue | 100 |
| Operating income (EBIT) | 45 |
| Net income | 32 |
| Add back: D&A | 5 |
| EBITDA (top-down) | 50 |
Top-down: EBIT of 45 plus D&A of 5 equals EBITDA of 50 million. Bottom-up: net income of 32 plus taxes of 8 plus interest of 5 plus D&A of 5 also equals 50 million. With revenue of 100 million, the EBITDA margin is 50 percent. Both routes agree, which is the point of knowing both.
Why do bankers use EBITDA, and what are its limits?
Bankers use EBITDA because it standardizes comparisons, but it hides real costs that can mislead. Per CFI, EBITDA is capital-structure-neutral, so two companies with very different debt loads can be compared on operating performance, and it is tax-independent, removing distortions from different tax jurisdictions. That is why it anchors multiples like EV/EBITDA used throughout comparable company analysis, which let you value a business independent of how it is financed.
The limits are just as important in an interview. EBITDA ignores capital expenditures, which CFI calls its primary criticism, since capex is a major recurring cash outflow for asset-heavy businesses. It also overlooks changes in working capital and, as a non-GAAP metric, gives management discretion over what to add back. Warren Buffett has criticized EBITDA precisely for excluding the reality that assets must eventually be replaced. A company can post strong EBITDA and still burn cash if its capex and working-capital needs are high. For the full picture you connect it to the three financial statements and to free cash flow.
What is the difference between EBITDA and adjusted EBITDA?
Adjusted EBITDA is standard EBITDA with one-time or non-recurring items further added back to better reflect normalized, ongoing profitability. Companies adjust EBITDA to remove items they argue are not part of regular operations: restructuring charges, litigation settlements, stock-based compensation, impairment write-downs, and other one-off costs. The goal is to show a cleaner run-rate earnings figure. Per CFI, removing non-recurring items lets analysts compare core performance across periods. The catch is that adjusted EBITDA is not GAAP-standardized, so management has discretion over what counts as non-recurring, and aggressive add-backs can inflate the number. In a deal, buyers scrutinize every adjustment, which is why a "quality of earnings" review exists. Treat adjusted EBITDA as useful but never as a number to accept at face value.
How is EBITDA different from operating cash flow?
EBITDA and operating cash flow both start from operating profitability, but operating cash flow captures cash effects that EBITDA ignores. EBITDA adds D&A back to operating income and stops there. Operating cash flow, from the cash flow statement, also reflects changes in working capital, such as cash tied up in receivables and inventory, and it accounts for taxes actually paid and other non-cash adjustments. So a company growing fast might show healthy EBITDA while its operating cash flow lags, because it is plowing cash into inventory and receivables to support that growth. EBITDA is a profitability proxy; operating cash flow is closer to the actual cash the business generates. The gap between them, driven by working capital and capex, is exactly what EBITDA's critics point to. When you bridge from EBITDA toward valuation, see unlevered vs levered free cash flow.
Frequently Asked Questions
What does EBITDA stand for?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Each item is added back to a profit measure: interest removes the effect of financing, taxes remove jurisdiction differences, and depreciation and amortization remove non-cash charges that spread asset costs over time. The result is meant to reflect operating profitability before financing and accounting choices.
Which EBITDA formula should I use in an interview?
Use whichever starting point the question gives you. If you are handed net income, add back interest, taxes, depreciation, and amortization. If you are handed operating income (EBIT), add back only depreciation and amortization, because EBIT already excludes interest and taxes. Knowing both and saying they reconcile to the same number signals you understand the income statement rather than memorizing one formula.
Is EBITDA the same as operating cash flow?
No. EBITDA is operating income plus D&A, while operating cash flow also includes changes in working capital and taxes actually paid. Wall Street Prep calls EBITDA a normalized operating cash flow proxy, but it is not the real cash flow figure. A company can have strong EBITDA and weak operating cash flow if it ties up cash in inventory and receivables.
Why does Warren Buffett criticize EBITDA?
Buffett's core objection is that EBITDA ignores capital expenditures, treating depreciation as if it were not a real cost. But assets wear out and must be replaced, so capex is a genuine recurring cash outflow. By adding back depreciation without subtracting capex, EBITDA can overstate how much cash a capital-intensive business truly generates, which is why he favors metrics that account for asset replacement.
What is a good EBITDA margin?
There is no universal benchmark, since EBITDA margin varies widely by industry. Software companies often post very high margins because they are asset-light, while retailers and manufacturers run much lower. Rather than memorize a number, compare a company's EBITDA margin to its direct peers and its own history, and explain why the business model supports the margin level it reports.
How does EBITDA relate to enterprise value?
EBITDA is the most common denominator in valuation multiples, paired with enterprise value as EV/EBITDA. Because EBITDA is before interest, it reflects earnings available to all capital providers, which matches enterprise value, a measure of the whole business. See enterprise value vs equity value for how the pieces fit.
Sources
- Corporate Finance Institute, "What Is EBITDA? Definition, Formula & Examples": https://corporatefinanceinstitute.com/resources/valuation/what-is-ebitda/ (checked June 2026)
- Wall Street Prep, "EBITDA Primer: Formula + Calculator": https://www.wallstreetprep.com/knowledge/ebitda/ (checked June 2026)
- Indeed Career Advice, "How To Calculate EBITDA in 3 Steps (With Examples)": https://www.indeed.com/career-advice/career-development/how-to-calculate-ebitda (checked June 2026)