Earnings before interest, taxes, depreciation and amortization (EBITDA) is the primary calculation used to determine how much of a company’s cash flow comes from ongoing operations. It is an important indicator of the health of a business.
EBITDA is calculated from contents of the income statement using the following formula:
Net profit + interest + taxes + depreciation + amortization
EBITDA can be either positive or negative. A business is considered healthy when its EBITDA is positive for a prolonged period of time. Even profitable businesses, however, can experience short periods of negative EBITDA.
Bankers and other finance professionals use EBITDA to decide how much money they are willing to lend a company. They may use other measures as well, but EBITDA is one of the strongest and most consistent measures.
EBITDA is also used to:
- Help determine the value of a company
- Assess a company’s ability to pay its debts
- Determine the ability of a business to generate surpluses for activities like paying dividends
More about EBITDA
According to the income statement below, ABC Co.’s EBITDA is:
$20,000 + $8,000 + $10,000 + $5,000 = $43,000
This is a positive amount and the company is currently considered healthy.