How to calculate EBITDA?

• Formula 1: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

• Formula 2: EBITDA = Operating Income + Depreciation + Amortization

Both formulas are used to calculate what the company's earnings would be if taxes, interest, amortization, and depreciation were not taken into account. The second formula relies on a close relative of EBITDA called EBIT (earnings before interest and taxes), which is equal to a company's operating income.

Tips for calculating EBITDA:

• Calculate operating expenses, such as the cost of goods sold, depreciation, interest expense, and other costs associated with running the business.

  • Earnings - how much the company makes in a given quarter

  • Interest - how much are you paying off the top of the principal

  • Taxes - income and property taxes, states and federal

• Subtract the total of these operating expenses from the total net income to arrive at EBITDA.

• Ensure that all expenses used to calculate EBITDA are only those related to running the business, not one-time costs or non-recurring expenses.

• Analyze past trends in EBITDA and make projections for future performance.

• Compare EBITDA with other companies in the same field.

EBITDA has several fundamental flaws. First, it can be misleading. For example, suppose a company has excessive debt and thus is paying a lot in interest every year. In that case, EBITDA will likely make the company seem more profitable than it is.

Finally, EBITDA does not account for certain expirable assets, like copyrights and patents, or assets that lose value over time, such as machines or vehicles. EBITDA ignores capital expenditures as a whole, a primary concern of Warren Buffet, CEO of Berkshire Hathaway.