How to Calculate EBITDA From EBIT: A Simple Formula

EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are financial metrics used to assess a company’s profitability. EBIT represents a company’s profit from its core operations before interest expenses and income taxes. It offers insight into a business’s operational performance, irrespective of its capital structure or tax environment. EBITDA expands on EBIT by excluding non-cash expenses, specifically depreciation and amortization. This article explains how to calculate EBITDA from an EBIT figure. This calculation is a common analytical approach to better understand a company’s operational cash flow, as it removes the impact of non-operating factors.

Understanding the Components to Add Back

To derive EBITDA from EBIT, two primary non-cash expenses are added back: depreciation and amortization. These are accounting entries that spread an asset’s cost over its useful life, rather than representing a new cash outflow. The actual cash outlay for these assets occurred when they were initially purchased. Understanding these components is crucial for accurately calculating EBITDA.

Depreciation allocates the cost of tangible assets over their useful life. Tangible assets are physical items a business owns, such as machinery, vehicles, and buildings. This expense reflects the gradual reduction in an asset’s value due to wear and tear or use over time. Recording depreciation helps align the expense of using an asset with the revenue it generates. It provides a more accurate picture of a company’s profitability over time by matching asset usage with revenue.

Amortization is similar to depreciation but applies to intangible assets. Intangible assets lack physical form but hold value for a business, such as patents, copyrights, and trademarks. Like depreciation, amortization spreads the cost of these assets over their estimated useful life. Both are added back to EBIT because they do not involve current cash expenditures, providing a clearer view of a company’s operational cash flow before financing and tax considerations. This adjustment helps analysts compare companies with different asset structures more effectively.

The Calculation Method

Calculating EBITDA from EBIT involves adding back the non-cash expenses of depreciation and amortization. The fundamental formula to determine EBITDA starting from EBIT is:

EBITDA = EBIT + Depreciation + Amortization

In this formula, EBIT reflects operating profitability. By adding back depreciation and amortization, the resulting EBITDA figure provides a measure of a company’s profitability that is less influenced by non-cash accounting decisions or financing and tax structures.

Applying the Calculation with an Example

To illustrate the calculation, consider a hypothetical company, “Widgets Inc.,” with the following financial figures for a specific period. Widgets Inc. reports an Earnings Before Interest and Taxes (EBIT) of $500,000. Additionally, its financial statements show Depreciation expenses of $75,000 and Amortization expenses of $25,000 for the same period.

To calculate Widgets Inc.’s EBITDA, these figures are directly applied to the formula:

EBITDA = EBIT + Depreciation + Amortization
Substituting the given numbers:
EBITDA = $500,000 (EBIT) + $75,000 (Depreciation) + $25,000 (Amortization)
EBITDA = $600,000

Therefore, Widgets Inc.’s EBITDA for the period is $600,000. This example demonstrates how the non-cash expenses of depreciation and amortization are added back to EBIT to arrive at the EBITDA figure.