What is EBITDA? - Definition & Formula

What is EBITDA? - Definition & Formula
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  • 0:03 The Income Statement
  • 0:30 Operating vs…
  • 1:25 EBITDA
  • 2:58 Lesson Summary
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Lesson Transcript
Instructor: Darlisha Oliver
In business, managers are interested in analyzing the company's performance. To do this, they would look at the company's earnings before interest, taxes, depreciation, and amortization (EBITDA). Let's take a look at EBITDA and how it's calculated.

The Income Statement

One of the financial statements used to assess how well a company performed for a given period is the income statement. Often referred to as the profit and loss statement, or P&L, the income statement displays revenues and expenses for a given period, showing a bottom line profit or loss for the company. Two categories of expenses are subtracted from total revenue to calculate the company's profit for the period: operating expenses and non-operating expenses.

Operating vs. Non-Operating Expenses

Operating expenses include selling expenses, general and administrative expenses, depreciation, and amortization. These expenses are directly related to and incurred from operating the business on a day-to-day basis. Some examples of selling expenses include commissions paid to salespeople and advertising costs. General and administrative expenses include salaries, wages, and office supplies. Depreciation is the decline in value a company's long-term assets experience from being used, which the company must record as an expense. Amortization is the decline in value the company's intangible assets experience over time that the company must record as an expense. Examples of intangible assets include patents and goodwill.

Non-operating expenses include expenses such as interest. Interest costs come from loans the company may have taken out for general funding purposes for which the company now owes interest.

EBITDA

The basic format of the income statement is shown:

Basic Income Statement

As you can see, operating income is equal to sales minus costs of goods sold and operating expenses. Because operating income is income after depreciation and amortization have been subtracted, we have to add these two amounts to operating income to compute EBITDA. See the formula to compute EBITDA here:

EBITDA = Operating Income + Depreciation + Amortization

For Example, ABC Company has $10 million in sales for the year ending December 31, 2015. Cost of goods sold for the company is $2 million. Operating expenses for the period total $3 million, which includes $500,000 in depreciation and $1 million in amortization costs. EBITDA for the company is calculated as follows:

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